The Impact of Capital Structure and Liquidity Corprate of Return in Firm

7/25/2019 The Impact of Capital Structure and Liquidity Corprate of Return in Firm

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RESERCH&MANAGEMENT PROJECT

Topic:The impect of capital structure an liauiit! of corporate return infirms

Prepare "!:

Name: M.Shahid Naseer

Ghulam Abbas

Class: #S Commerce

Roll No$: %'(&%')

Session: *'+',*'+-

CO..EGE O/ COMMERCE

GO0ERNMENT CO..EGE 1N20ERS2T34 /A2SA.A#A5


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+$ 2ntrouction:

Capital is calle the feasi"ilit! that stron6 the 6ro7th resources4 !iel4 output4

return4 profit4 interest rate4 ma6nitue of "usiness an finish the pro"lem of e"t of "usiness$ 2t

impro8es the performance of "usiness$it is that "loo of the or6ani9ation an pla! 8ital role in theprouction sector for the "usiness esta"lishment$ 2t is use for purchasin6 machiner! an

hi6hrin6 the epert persons$ ;ith the 6oo capital structure the mana6er ma+? 5escripti8e statistics an multiple

re6ression$ 2f capital is not o7n than the short term an lon6 term e"t increases the lia"ilit! of

the firm 7hich ecreases the loss$4 success impro8ement4 e8elopment4 hea7a! achie8ement of

"usiness epens on the capital an capital net7or


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The mana6er can introuce the ne7 technolo6! an competes his "usiness in the mari? Actual resources >ii?in8estin6 capital >iii?Enterprise >i8?Technical Smanner$ 3ou people shoul "e succeein6 in the "usiness ris


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Prouction sector or pro"lem of financin6 !ou 7ill "e fare the name of failure$ A 6oo

"usiness man shoul al7a!s fare the ifficulties in the "usiness line$ There are t7o 7a! of

in8estment4 the first 7a! is calle insier in8estment an secon one is calle outsier

in8estment$ 2n the first one the finance is in8este the emplo!ees of the compan! an in the

outsier in8estment the finance is in8este outsier emplo!ees or not emplo!ees of the compan!$

/or the hi6h t!pe of "usiness the Go8t$ hi6her ratio of ta 7hich has to pa! the "usiness4

if compan! has 6oo capital 4than it can "e easil! pa! out 7ise it ma! suffer of eficienc!$ 2n the

lar6e t!pe of "usiness4 the loan facilit! is 6i8en to the firm of poor emplo!ees for the omestic

use$ 2t is onl! possi"le 7hen capital structure 7ill "e stron6 in orer to oin6 the "usiness of

eport an import$ ;e shoul pa! uc< ues an custom char6es those epenents on the

"usiness capital nature4 "ecause the capital pla! 8ital role in the "usiness sector$

Accorin6 to philosopher BThe capital is an amount that is a8aila"le at the time of

necessit! an "usiness 7ill "e run on the ri6ht an6le$ Some important points 7hich are more

focuse in the capital criteria$

+$ Etra capital shoul "e a8aila"le for "usiness oin6$

*$ #! usin6 this capital in "etter 7a!4 the performance an amount of capital shoul

"e increase

$ #! usin6 this capital 7e shoul earn the profit 7hich "asic purpose of startin6 the

ne7 "usiness$

* .iterature Re8ie7

Here such information are escri"e that are a"out to the literature in orer

to pro8iin6 the literature frame7or< that practicall! ma


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The capital stu! consists on the theoretical frame7or< for the

sa

The capital structure epens on the lon6 term sources an similarl! short term

resources if 7e 6i8e the eample of the lon6 term finance that is e"t an e=uit! an the short

term finance is cash an reser8e etc$it is also calle the ran6e of internal an eternal financin6$

The capital structure inclues the follo7in6 thin6s$

>i? Rein8este Profit


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t o"li6ate the fun to their firms$ The capital structure is ac=uire the firm epens slo7l! firm

performance profita"ilit! an a"ilit! to prouce the funs internall! an eternall! $These are

most proper to 6i8e the chance to achie8in6 the o"@ecti8e of the or6ani9ation$ As to more the

more in8estor the act of ma


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/xperimental implementation o the model will be making use o a cross)

sectional time series data co*ering &''(0&'$& to determine the in1uence o

capital structure *ariables on corporate profts among the fnancial sector o

Pakistan.

3.1. Model Specication

odel specifcation in which use o di2erent model and use the di2erent

*ariables such as, *ia+ *alue o short)term debts, *alue o long)term debts,

and domestic liuidity ratio. 3n our model we wanted to establish i uantum

o short)term debt, long)term debt, and corporate liuidity profle will ha*e

signifcant in1uence on business structure o fnancial sector o Pakistan.

Thereore the need or the modifcation in our model.

Thus the models or the study are specifed as a regression unction as

ollows+

Proft 4 -5apital Structure

6ependent 7ariables+

6ependent *ariables are those *ariable which those on the

other *ariable is called dependent *ariables in this paper use o the

89/-8eturn on euity are the dependent *ariable such as ollowing.

89/4 -/arnings a*ailable to common shareholders: Total /uity ; $''

89/4 ao here+

89/ 4 the measure o producti*ity which is return on euity capital

employed?

ao 4 the regression constant -i.e. intercept o euation?


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e 4 the random error term which captures other explanatory *ariables not

explicitly

3nclude in the model.

The general list suares euation abo*e will now be restated with the

specifed *ariables

Thus below?

89/ 4 -8S6TA, 8A6TA, 8/5TA, 8A6T/5, 7ST6, 7AT6, 6A8

-) -) -) -C -) -C -C

>here+

89/ 4 return on euity is the dependent *ariable. 3t is a measure o

corporate

Perormance and proftability.

3ndependent *ariable+

The 8atio o short term debt to total liability -8ST6A is the independent

*ariable which shows the perormance o the debt in the business o the

fnancial.

The Dormula o the 8atio o short term debt to total liability -8ST6A

8ST6A 4 Short term debt:Total Aiability

8atio o Aong term debt to Total liability -8A6TA

This ratio in which measure the long term debt

in the total liability. This ratio shows the perormance o the long term debt.

The ormula o the 8atio o Aong term debt to Total liability

8A6TA4 Aong term debt:Total liability

8atio o euity capital to total Aiability -8/5TA

This ratio in which the measured the euity

capital in the total liability. This ratio shows the perormance o the euity

capital.

The ormula o the 8atio o euity 5apital to total liability


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8/5TA4 /uity capital:Total liability

8atio o long term debt to Total euity+

This ratio measured the long term debt to calculate

among the euity o capital.

Dormula

8A6T/54 long term debt : euity capital

6omestic liuidity 8atio+

This ratio show the domestic o the use o cash and reser*e

in the frms

Dormula+

6A84 5ashC all reser*e:5urrent liabilities E$''

7alue o long term debt -7AT6+

These ratios show the long term debt *alue o the frm in

the frm and sector and recei*e the all o debt in the frm

7alue o short term debt+

This *ariable shows the *alue o the short term debt o the frm and also

measured the *alue o the short term debt in the frm"ter all the estimated the euation o the 89/

89/ 4 ao ) b$ 8S6TA ) b& 8A6TA ) b# 8/5TA C bF 8A6T/5 ) b% 7ST6 C bG

7AT6 C bH 6A8 C e

3.2. Data Requirements and SourcesThe study samples are frms listed on the Karachi Stock /xchange. There #$

banks were selected co*ering the fnancial sector o the Pakistan. They

include the all the o cash and reser*es are stored in this sector all the

fnancial transaction are in*ol*ed in this sector. The data used or the study

include annual reports and statement o accounts o #$ banks or the years

&''( 0 &'$&, retrie*ed and completed by the many research paper. These

orm the secondary data or the study, which were generated rom balance


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sheets and accounts o this fnancial sector. This period was chosen because

o accessibility to the fnancial statements.

F. Estimation of Results and Discussions:This section pro*ides the

details o the model and fndings o the study. Beore mo*ing towards ormaldiscussion o results, an analysis o descripti*e statistics is presented.

.1 Descripti!e Statistics:There are ollowing show the and measured thedescripti*e statistics

"a#le 1 Descripti!e Statistics

8S6TA 89/ 8A6TA 8A6T/5 8/5TA 6A8

ean )'.$(I$G '.'$GG$( '.(IG$(I '.$FF$G( $'.GH'HF $H''.$&

edian '.'%G% '.'$'F(& '.IFG'# '.$'&HF$ H.'I%&H( (GF.$($$

aximum

'.&IF# '.(HG%FH '.I(G'HF #.'($F% #&(.%HGG %FHI#.#G

inimum )$F.HF&H '.'''## '.$GFI&% )'.(%I'F )FI.%HH$ &'.'#&(G

Std. 6e*. $.%#F#FH '.'H'F#I '.$G'&F# '.##%%G% &I.'$GF$ %'%I.%'G

Table $ pro*ides the descripti*e statistics or all the *ariables. 3t shows $%%

the number o obser*ations o all *ariables, their ean *alues and edian

and their standard de*iation. 3t shows the minimum and maximum *alues as

well which can be attained by these *ariables. The descripti*e statistics show

that all the *ariables ha*e $%% obser*ations. The dependent *ariable returns

on /uity ha*e the ean *alue o '.'$GG$( and edian *alue '.'$'F(&. 3t

has a minimum *alue o '.'''##. "nd a maximum *alue o '.(HG%FH. The

standard de*iation or return on euity is '.'H'F#I.


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To check the working capital in*estment policy o these Banks, 8S6TA is

included, it has ean 7alue o '.$(I$G and itJs the edian *alue is '.'%G%.

inimum *alue o 8S6TA is '.'.'%G%. "nd its maximum *alue is '. '.&IF#. To

check the fnancing policy adopted by the selected fnancial sector or the

management o working capital and its relationship with proftability, Aong

term debt to total Aiabilities -8A6TA is used. 3t has a ean *alue o '.(IG$(I

and its median *alue'.IFG'#. >hile the standard de*iation o'.$G'&F#. The

minimum *alue or 8A6TA is '.$GFI&% and the maximum *alue or it is

'.I(G'HF. The independent *ariable 8atio long term debt to total /uity

-8A6T/5 has a maximum *alue o#.'($F% and a minimum *alue o

)'.(%I'F. 3t has a ean *alue o '.$FF$G( and its edian *alue is'.$'&HF$.

>hile standard de*iation o '.##%%G%. To determine the frm sie and its

impact on working capital management, 8atio euity capital to total liability

-8/5TA is included. ean *alue o this *ariable is $'.GH'HF and its median

*alue is H.'I%&H(.The maximum *alue or -8/5TA is #&(.%HGG and the

minimum *alue or this is )FI.%HH$.3t has a standard de*iation o &I.'$GF$.

To check the le*erage o these frms, -6A8 is used. 3t has the ean *alue

o $H''.$& and its edian *alue is(GF.$($$. >hile standard de*iation o

%'%I.%'G.The minimum *alue is &'.'#&(Gor -6A8 and its maximum *alueis %FHI#.#G.

4.2 Correlation Analysis:There are follo7in6 ta"le sho7 an measure the correlation

anal!sis of the epenent an inepenent 8aria"les$ 2n this ta"le use the ifferent 8aria"les$

Such as > RS5T.?4>ROE?4>R.5T.? >R.5TEC?4>RECTE.?$>5.R?

"a#le $o. 2 correlation %nalysis

8S6TA 89/ 8A6TA 8A6T/5 8/5TA 6A8


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8S6TA $

89/ '.'# $

8A6TA '.'$IF%$ )'.'(%H& $

8A6T/5 )'.'$'IG )'.((FG# '.$'%GF& $

8/5TA '.'$'HGF '.'%F'%G '.'(F%'F )'.'GG#I $

6A8 )'.'F%F( '.'$#&G( '.'&'( )'.'%H&% '.%$&$#($

5orrelation analysis explains the relationship between two *ariables. 3t shows

change in one *ariable because o any change in other *ariable. Table &

shows the correlation analysis. This analysis helps to locate the relationshipthat exists among the independent or illustrati*e *ariables. 3t means the

occurrence o mutli)colinearity among the independent *ariables. ulti)co

linearity can in1uence the results, so a good model should not ha*e any

multi)nonlinearity among the analysts. Dirst o all correlation between

dependent *ariable which is return on /uity -89/ and independent *ariable

8atio o short term debt to Total liability -8S6TA, is analyed. The results o

correlation analysis show a positi*e correlation between them ha*ing a *alue

o '.'#. This correlation indicates that these two *ariables ha*e a positi*e

relationship with each other i.e. i there will be an increase in ratio o short

term debt to total liability then the dependent *ariable return on euity will

also increase and *ice *ersa. 8eturn on /uity -89/ has a negati*e

correlation with independent *ariable ratio o long term debt to total liability


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-8A6TA. The *alue o this correlation is a 0'.'(%H& ha*ing p)*alue . The p)

*alue shows the meaning o the relationship between return on euity and

ratio o long term debt to total liability at di2erent le*el o signifcance. This

correlation is good or the study as it shows a signifcant relationship

between independent *ariable ratio o long term debt to total liability and

dependent *ariable return on euity. The correlation outcomes or ratio o

short term debt -8S6TA ratio o long term debt to total liability -8A6TA show

that they ha*e a positi*e correlation o '.'$IF%$ with each other. This means

that an increase in the *alue o independent *ariable ratio o short term debt

total liability will cause an decrease in ratio o long term debt to total liability

and *ice *ersa. . The correlation o return on euity and long term debt to

total liability is )'.'$)IG. This correlation has a negati*e *alue so this

relationship is also positi*e as the pre*ious one. 8atio to short term debt to

total liability -8S6TA and ratio o the long term debt to total euity -8A6T/5

has a correlation *alue o )'.'$'IG. The correlation results or ratio o short

term debt to total liability and long term debt to total euity o show a

negati*e relationship between them.

8atio o short term debt to total liability has a positi*e relationship with ratio

o euity capital to total liability. The *alue o correlation coe!cient betweenthem is '.'$'HG.


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This correlation signifes that a raise in ratio o short term debt to total

liability is accompanied by an increase in ratio o euity capital to total

liability and *ice *ersa. 5orrelation determines a negati*e relation between

ratio o short term debt and ratio o 6omestic liuidity ratio -6A8.

5orrelation coe!cient or these is )'.'F%F(. Legati*e relation shows that an

increase in ratio o short term debt to total liability subseuently causes a

decrease in 6omestic liuidity ratio 6A8. The positi*e relationship shows

between ratio o long term debt to total liability and ratio o long term debt

to euity capital. 5orrelation or this is '.$'%GF& ha*ing to showing positi*e

and signifcant relationship between these two *ariables. 5orrelation ratio o

long term debt to liability with ratio o euity capital to liability is '.'(F%'F.

8atio o long term debt to liability has an signifcant but positi*e relationship

with domestic liuidity ratio. 3t has a correlation is '.'&'(. The negati*e

relationship shows between ratio o long term debt to euity capital and ratio

o euity capital to liability. 5orrelation or this is )'.'GG#I. The negati*e

relationship shows between the ratio o long term debt to euity capital

-8A6T/5 and domestic liuidity ratio -6A8. 5orrelations show *alue is)

'.'%H&%. The ratio o euity capital to liability and domestic liuidity ratio

ha*e the '.%$&$#( correlation between them. Drom table & it is rather strongthat all the independent *ariables ha*e correlation coe!cient *alues less

than $.


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F.# 8egression "nalysis+There is ollowing table show the and measured regression

analysis and in this table show the 8eturn on euity is dependent *ariable

and other is the independent *ariables.

F.# Table 8egression "nalysis

6ependent 7ariable+ 89/

ethod+ Panel /MAS -5ross)section

weights

&aria#le 'oe(ci

ent

Std.

Error

t)Statistic

*ro#.

' )'.&(F$ '.'H(( )#.G'#& '.'''%

RSD"+ )'.'&'H '.'FI$ )'.F&$# '.GHF#

R+D"+ '.H&$( '.'($$ (.(IHH '.''''

RE'"+ )'.#II$ '.$(F' )&.$GI& '.'#&$

R+D"E' )'.'FF( '.''$' )F%.$&%% '.''''

D+,R '.'''' '.'''' )'.H&I# '.FGH#R)squared '.IG#H ean dependent *ar '.F$HF

%d-usted R)

squared

'.I%&( S.6. dependent *ar &.&&(%

S.E. of regression '.F#F% Sum suared resid &$.(I(

I)statistic (H.IIH# 6urbin)>atson stat $.H&&%

*ro#/)statistic0 '.''''

Table F.# determines the results o di2erent *ariables. "t less than ero le*el

o importance, ratio o short term debt to total liability appears to be

important in this Table. 8atio o long term debt to total liability is also maNor

in this model but its importance le*el is $O."ll o the three control *ariables

i.e. 8atio o euity capital to total liability, ratio o long term debt to total

euity capital and domestic liuidity ratio are signifcant in the in the abo*e


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table . They do not cause any signifcant change in the independent *ariable.

The signifcance o use all the *ariable shows its correlation with the

dependent *ariable, return on /uity. These are predictors a2ect the

independent *ariable. " change in any o them will defnitely cause some

change in dependent *ariable. The


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and the probability *alue is '.'#&$ and this show the signifcance le*el. The

ratio o long term debt to euity capital is the t. statistics *alue is )F%.$&%%

and the std. error *alue is '.''$' and probability *alue is '.'''' and this is

signifcance le*el. "ter this *alue the next *ariable is domestic liuidity ratio

the t. statistics *alue is )'.H&I# and the std. error *alue is '.'''' and

probability *alue is '.FGH# and this show the signifcance le*el. 3n this table

the ean dependent *ariable then *alue is '.F$HF and the S.6 dependent

*ariables *alue is &.&&(% and the last *alue in this table are showing and

measured 6urbin >atson stat *alue is $.H&&%.

%. 5onclusion+

The 5apital structure is one o the most important fnancial

decisions o a fnancial sector such as banks. /2ecti*e le*el o 5apital

structure should be present or 1at running o business ne*ertheless o the

en*ironment o business. Drom this study, it is concluded that keeping

e2ecti*e le*el o capital is *ery important or fnancial sector as well

corresponding all other sectors o business.

The present study contains #$ banks or frms o Pakistan or a time extent o

f*e years rom &''( to &'$&. 3t disco*ers the role o e2ecti*e capital

structure in producing proftability through two main policies o capital

structure namely capital fnancing policy. The fnancing policy is concerned

round the managing o current liabilities such as the short term debt.

3n destructi*e capital structure fnancing policy more current liabilities is

using than long)term debts and iniuity or con*entional fnancing policy. The

results o this study show that con*entional fnancing policy also results in

more e2ecti*eness. oreo*er, the results show that the positi*e and


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negati*e relation between in the descripti*e statistics and the correlation and

the regression analysis.

3n this research paper 3 can also the di2erent research paper and fnd out the

di2erent result. The disco*eries o this study a *ery helpul or the fnancial

managers o the fnancial sector such as mostly banks. These sectors deli*er

the inormation concerning the management o short)term capital and also

inorm them about the managing strategies used by their nobles. This

e*idence is useul or keeping a strong competition and successul own

organiation. Qltimately it is mentioned that the managers should e2ort to

create good relation between /uity capital and liabilities o the frm, which

demonstrates, there is a signifcant relationship between the di2erent*ariable are using in this sector. Positi*e and signifcant relations are creating

between degree o opposition o fnancing policy o capital structure and

e2ecti*eness o fnancial sector o Pakistan. The results show a negati*e and

signifcant relationship o e2ecti*eness with unit o *iolence o capital

fnancing policy and using the di2erent *ariables.


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But to co*er all the extents and to include all the *ariables is Nust not

possible. So, the results probable rom this study should be estimated kept in

mind that there could be many other *ariables as well also the *ariables

stated abo*e, that can describe capital structure and e2ecti*eness

correlation and this study is incomplete only to the e2ect o selected

*ariables in determine the e2ecti*eness o capital structure. "nother

limitation o the proNected study is that the data are using o only % years due

to the check o absence o obtainability o data. This study has the

conseuence or fnancial sector only. These are *ariables can be used such

as short term debt, long term liabilities , return on euity and euity capital

and cash, reser*e etc. Dinancial sector is nominated or this study? uture

research can also be done or other sectors such as the chemical sector and

the others. 8esearch can also be made on chemical and textile sector which

unknown with respect to capital structure. This study accomplishes that

*iolence o capital structure policies is in*ersely related to e2ecti*eness. This

indicates that the fnancial managers o fnancial sector should monitor

con*entional fnancing policy o capital structure i.e. they should in*est

more o their fnancial resources long term debts as compared to current

liabilities and others.


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The Impact of Capital Structure and Liquidity Corprate of Return in Firm

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