CAPITAL STRUCTURE DETERMINANATS: AN EMRICAL STUDY OF FOOD & PERSONAL CARE SECTOR OF PAKISTAN

B: Mr. Abdul KhaliqPervaiz Memon

Um-e-salmaGhulam Abbas

Introduction & Literature Review Objectives of Study Data & Methodology Results Discussion & Conclusion

Capital Structure? In 1958, First Scientific Research by

Modigliani and Miller (MM) proved irrelevance of capital structure on firms value assuming no taxes.

In 1963, MM proved tax shield benefit of leverage leading to increase in value of firm.

In 1977, Scot proposed Tradeoff theory. In 1984, Myers and Majluf proposed Pecking order

theory In 1995, Rajan & Zingles found positive correlation

of tangibility and sales with leverage and negative correlation of market to book ratio and profitability.

In 2003, Drobetz & Fix took six determinants-tangibility, size, market to book ratio, profitability, volatility, uniqueness of products and non-debt tax shield. They found tangibility and size positively correlated and profitability and growth negatively correlated with leverage.

In 2004, Shah & Hijazi studied non-financial firms listed on KSE and took tangibility, size, profitability and growth as determinants. They found positive impact of tangibility and size and negative impact of profitability and growth

In 2007, Shah & Khan studied the no-financial firms listed on KSE and took six variables-size, profitability, volatility, growth, tangibility and non debt tax shield. They found the only one significant result, negative relationship between profitability and leverage.

To identify the determinants of Capital Structure in Food & Personal Care Industry

No. Factor Expected SignMain Theory/ Weak Support Proxy

1Profitibility Negative Pecking OrderNet Income / Total Assets

2Size Positive

Bankruptcy Cost Theory / Tradeoff Theory Log of Sales

3Tangibility PositiveMyers Version of Tradeoff Theory

Fixed Assets / Total Assets

4Growth Opportunities Positive Pecking Order

Annual Percentage Change in total assets

5Tax Rate Positive MM & Tradeoff Tax Rate

6Risk Negative Pecking OrderDeviation from Mean

Balance Sheet Analysis of SBP Data of 16 Firms from Food & Personal

Care sector Listed at KSE was taken from year 2000-2008.

Pooled Regression Analysis, constant coefficient model is employed ignoring time and cross-sectional influence.

However, GSL method is employed to eliminate heteroscadisticity.

No. Factor Expected Sign Observed Sign

1 Profitibility Negative Negative

2 Size Positive Positive

3 Tangibility Positive Negative

4 Growth Positive Positive

5 Tax Rate Positive Negative

6 Risk Negative Negative

The model explained 87% of variation in leverage collectively by six variables, and it was significant since F-statistices was 30.8

However, only two variables, growth and size, were significant.

Having the significant positive impact of size of firms supports the bankruptcy Cost Theory as we proposed.

It confirms the results of Shah & Hijazi(2005),Friend & Lang(1988), Titman & Wessels(1988) and Pinches & Minngo(1973).

In Food & Personal Care sector,the larger firms tend to borrow more, because they are more diversified, have easy access to borrowing, lesser chances of default due to external support, get better credit rating and borrow at lower cost.

Having the significant positive impact of growth of firms supports the Pecking Order Theory and contradicts the agency cost theory( Drobetz & Fix 2003)

In Food & Personal Care sector, Growing Firms mostly finance their growth with debt.

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