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CORPORATE FINANCIAL POLICY AND ITS IMPACT ON SUSTAINABLE CAPITAL STRUCTURE: EMPIRICAL EVIDENCE FROM TEXTILE FIRMS OF PAKISTAN
Corresponding Author(s) : Khurram Sultan
Humanities & Social Sciences Reviews,
Vol. 8 No. 2 (2020): March
Abstract
Purpose of the study: In this article, the objective is to discover the influence of business financial policy on the firm’s Capital structure of the textile zone of Pakistan. The present outcomes of productivity, total assets, future growth, and asset structure have started a discussion over the total debt ratio.
Methodology: The methodology used to conduct this work in order to examine the effect of total assets, future growth, profitability, and asset structure and its impact on total debt ratio, Panel data analysis has been accomplished and together the firm and industry explicit dynamics have been measured, yearly data has been taken off 96 textile firms of Pakistan concluded the period of 2012 - 2017 for OLS, regression model & LSDVM.
Main Findings: The results reveal that the OLS regression model is not a good fit and the model shows that there is no significant impact of all the independent variables on the dependent variables. Whereas the results of LSDVM indicated that this model is a good fit, the model revealed that the entire individuals have combined effect on the dependent variable. Similarly, the alternate hypothesis indicates the significant influence of independent variables on the dependent variable whereas the Null hypothesis indicated no or insignificant influence of independent variables on the dependent variable.
Application of this study: This study contributes toward the financial sector for policymakers in order to construct the best capital configuration of the firm. This study also suggests that which element is having more importance while making capital configuration of the firm.
The originality of this study: Capital structure is a crucial issue for entrepreneurs and CEOs of any firm. The number of studies is available related to other industries but fewer studies are available related to the textile firms of Pakistan so this research work provides the technique while making the best capital configuration for textile firms of Pakistan.
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- Alves, P. F. P., & Ferreira, M. A. (2011). Capital structure and law around the world. Journal of Multinational Financial Management, 21(3), 119-150. https://doi.org/10.1016/j.mulfin.2011.02.001 DOI: https://doi.org/10.1016/j.mulfin.2011.02.001
- Andrew. (2017). Capital Structure and Corporate Financial Policy Competition and Finance (pp. 76-113): Springer.
- Auerbach, A. J., & King, M. A. (1980). Taxation, portfolio choice, and debt-equity ratios: A general equilibrium model: National Bureau of Economic Research Cambridge, Mass., USA. https://doi.org/10.3386/w0546 DOI: https://doi.org/10.3386/w0546
- Bandyopadhyay, A., & Barua, N. M. (2016)Barclay, M. J., & Smith, C. W. (1999). The capital structure puzzle: another look at the evidence. Journal of Applied Corporate Finance, 12(1), 8-20. https://doi.org/10.1111/j.1745-6622.1999.tb00655.x DOI: https://doi.org/10.1111/j.1745-6622.1999.tb00655.x
- Barton & Gordon (2017). Predictors of capital structure in small ventures. Entrepreneurship Theory and Practice, 20, 7-18. https://doi.org/10.1177/104225879602000202 DOI: https://doi.org/10.1177/104225879602000202
- Barton, S. L., & Gordon, P. I. (1987). Corporate strategy: a useful perspective for the study of capital structure.Academy of Management Review, 12(1), 67-75. https://doi.org/10.5465/amr.1987.4306479 DOI: https://doi.org/10.5465/amr.1987.4306479
- Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6), 613-673. https://doi.org/10.1016/S0378-4266(98)00038-7 DOI: https://doi.org/10.1016/S0378-4266(98)00038-7
- Bird, R. M. (2003). Taxation in Latin America: reflections on sustainability and the balance between equity and efficiency. Available at SSRN 1393962. https://doi.org/10.2139/ssrn.1393962 DOI: https://doi.org/10.2139/ssrn.1393962
- Chang, Y.-K., Chou, R. K., & Huang, T.-H. (2014). Corporate governance and the dynamics of capital structure: New evidence. Journal of Banking & Finance, 48, 374-385. https://doi.org/10.1016/j.jbankfin.2014.04.026 DOI: https://doi.org/10.1016/j.jbankfin.2014.04.026
- Chathoth, P. K., & Olsen, M. D. (2007). The effect of environmental risk, corporate strategy, and capital structure on firm performance: an empirical investigation of restaurant firms. International Journal of Hospitality Management, 26(3), 502-516. https://doi.org/10.1016/j.ijhm.2006.03.007 DOI: https://doi.org/10.1016/j.ijhm.2006.03.007
- Chandler, J. P. (1962). U.S. Patent No. 3,039,460. Washington, DC: U.S. Patent and Trademark Office.
- Dang, V. A., & Garrett, I. (2015). On corporate capital structure adjustments. Finance Research Letters, 14, 56-63. https://doi.org/10.1016/j.frl.2015.05.016 DOI: https://doi.org/10.1016/j.frl.2015.05.016
- De Jong, A., Kabir, R., & Nguyen, T. T. (2008). The capital structure around the world: The roles of firm-and country-specific determinants. Journal of Banking & Finance, 32(9), 1954-1969. https://doi.org/10.1016/j.jbankfin.2007.12.034 DOI: https://doi.org/10.1016/j.jbankfin.2007.12.034
- Dewatripont, M., Jewitt, I., & Tirole, J. (1999). The economics of career concerns, part II: Application to missions and accountability of government agencies. The Review of Economic Studies, 66(1), 199-217. https://doi.org/10.1111/1467-937X.00085 DOI: https://doi.org/10.1111/1467-937X.00085
- Durand (2016). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0 DOI: https://doi.org/10.1016/0304-405X(77)90015-0
- Durand, D. (1952). Costs of debt and equity funds for business: trends and problems of measurement. Paper presented at the Conference on research in business finance.
- Hovakimian, A. (2006). Are observed capital structures determined by equity market timing?Journal of Financial and Quantitative Analysis, 41(01), 221-243. https://doi.org/10.1017/S0022109000002489 DOI: https://doi.org/10.1017/S0022109000002489
- Hovakimian, A., Hovakimian, G., & Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues. Journal of financial economics, 71(3), 517-540. https://doi.org/10.1016/S0304-405X(03)00181-8 DOI: https://doi.org/10.1016/S0304-405X(03)00181-8
- La Rocca, M., La Rocca, T., Gerace, D., & Smark, C. (2009). Effect of diversification on capital structure. Accounting & FinanceReview, 49(4), 799-826. https://doi.org/10.1111/j.1467-629X.2009.00304.x DOI: https://doi.org/10.1111/j.1467-629X.2009.00304.x
- Lowe, J., Naughton, T., & Taylor, P. (1994). The impact of corporate strategy on the capital structure of Australian companies. Managerial and Decision Economics,15(3), 245-257. https://doi.org/10.1002/mde.4090150306 DOI: https://doi.org/10.1002/mde.4090150306
- Marsh, P. (1982). The choice between equity and debt: An empirical study. The Journal of Finance, 37(1), 121-144. https://doi.org/10.1111/j.1540-6261.1982.tb01099.x DOI: https://doi.org/10.1111/j.1540-6261.1982.tb01099.x
- Modigliani & Miller. (1958). Capital structure decision making: A model for the family business. Journal of business venturing, 16(3), 285-310. https://doi.org/10.1016/S0883-9026(99)00053-1 DOI: https://doi.org/10.1016/S0883-9026(99)00053-1
- Öztekin, Ö., & Flannery, M. J. (2012). Institutional determinants of capital structure adjustment speeds. Journal of financial economics, 103(1), 88-112. https://doi.org/10.1016/j.jfineco.2011.08.014 DOI: https://doi.org/10.1016/j.jfineco.2011.08.014
- Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x DOI: https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
- Rapp, M., Schmid, T., & Urban, D. (2012). The value of financial flexibility and payout policy. Technische Universität München, Working Paper. https://doi.org/10.2139/ssrn.2081596 DOI: https://doi.org/10.2139/ssrn.2081596
- Shyam-Sunder, L., & Myers, S. C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of financial economics, 51(2), 219-244. https://doi.org/10.1016/S0304-405X(98)00051-8 DOI: https://doi.org/10.1016/S0304-405X(98)00051-8
- Sims (2012). How do CFOs make capital budgeting and capital structure decisions? Journal of applied corporate finance, 15(1), 8-23. https://doi.org/10.1111/j.1745-6622.2002.tb00337.x DOI: https://doi.org/10.1111/j.1745-6622.2002.tb00337.x
- Sims, C. A. (1999). Domestic currency-denominated government debt as equity in the primary surplus. Paper presented at the Latin American Meetings of the Econometric Society, Cancun, Mexico. August.
- Stephan (2017). Corporate Governance and the Dynamics of Capital Structure: New Evidence. Paper presented at the 25th Australasian Finance and Banking Conference.
- Thompson and jones. (2016). On corporate capital structure adjustments. Finance Research Letters, 14, 56-63. https://doi.org/10.1016/j.frl.2015.05.016 DOI: https://doi.org/10.1016/j.frl.2015.05.016
- Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x DOI: https://doi.org/10.1111/j.1540-6261.1988.tb02585.x
References
Alves, P. F. P., & Ferreira, M. A. (2011). Capital structure and law around the world. Journal of Multinational Financial Management, 21(3), 119-150. https://doi.org/10.1016/j.mulfin.2011.02.001 DOI: https://doi.org/10.1016/j.mulfin.2011.02.001
Andrew. (2017). Capital Structure and Corporate Financial Policy Competition and Finance (pp. 76-113): Springer.
Auerbach, A. J., & King, M. A. (1980). Taxation, portfolio choice, and debt-equity ratios: A general equilibrium model: National Bureau of Economic Research Cambridge, Mass., USA. https://doi.org/10.3386/w0546 DOI: https://doi.org/10.3386/w0546
Bandyopadhyay, A., & Barua, N. M. (2016)Barclay, M. J., & Smith, C. W. (1999). The capital structure puzzle: another look at the evidence. Journal of Applied Corporate Finance, 12(1), 8-20. https://doi.org/10.1111/j.1745-6622.1999.tb00655.x DOI: https://doi.org/10.1111/j.1745-6622.1999.tb00655.x
Barton & Gordon (2017). Predictors of capital structure in small ventures. Entrepreneurship Theory and Practice, 20, 7-18. https://doi.org/10.1177/104225879602000202 DOI: https://doi.org/10.1177/104225879602000202
Barton, S. L., & Gordon, P. I. (1987). Corporate strategy: a useful perspective for the study of capital structure.Academy of Management Review, 12(1), 67-75. https://doi.org/10.5465/amr.1987.4306479 DOI: https://doi.org/10.5465/amr.1987.4306479
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6), 613-673. https://doi.org/10.1016/S0378-4266(98)00038-7 DOI: https://doi.org/10.1016/S0378-4266(98)00038-7
Bird, R. M. (2003). Taxation in Latin America: reflections on sustainability and the balance between equity and efficiency. Available at SSRN 1393962. https://doi.org/10.2139/ssrn.1393962 DOI: https://doi.org/10.2139/ssrn.1393962
Chang, Y.-K., Chou, R. K., & Huang, T.-H. (2014). Corporate governance and the dynamics of capital structure: New evidence. Journal of Banking & Finance, 48, 374-385. https://doi.org/10.1016/j.jbankfin.2014.04.026 DOI: https://doi.org/10.1016/j.jbankfin.2014.04.026
Chathoth, P. K., & Olsen, M. D. (2007). The effect of environmental risk, corporate strategy, and capital structure on firm performance: an empirical investigation of restaurant firms. International Journal of Hospitality Management, 26(3), 502-516. https://doi.org/10.1016/j.ijhm.2006.03.007 DOI: https://doi.org/10.1016/j.ijhm.2006.03.007
Chandler, J. P. (1962). U.S. Patent No. 3,039,460. Washington, DC: U.S. Patent and Trademark Office.
Dang, V. A., & Garrett, I. (2015). On corporate capital structure adjustments. Finance Research Letters, 14, 56-63. https://doi.org/10.1016/j.frl.2015.05.016 DOI: https://doi.org/10.1016/j.frl.2015.05.016
De Jong, A., Kabir, R., & Nguyen, T. T. (2008). The capital structure around the world: The roles of firm-and country-specific determinants. Journal of Banking & Finance, 32(9), 1954-1969. https://doi.org/10.1016/j.jbankfin.2007.12.034 DOI: https://doi.org/10.1016/j.jbankfin.2007.12.034
Dewatripont, M., Jewitt, I., & Tirole, J. (1999). The economics of career concerns, part II: Application to missions and accountability of government agencies. The Review of Economic Studies, 66(1), 199-217. https://doi.org/10.1111/1467-937X.00085 DOI: https://doi.org/10.1111/1467-937X.00085
Durand (2016). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0 DOI: https://doi.org/10.1016/0304-405X(77)90015-0
Durand, D. (1952). Costs of debt and equity funds for business: trends and problems of measurement. Paper presented at the Conference on research in business finance.
Hovakimian, A. (2006). Are observed capital structures determined by equity market timing?Journal of Financial and Quantitative Analysis, 41(01), 221-243. https://doi.org/10.1017/S0022109000002489 DOI: https://doi.org/10.1017/S0022109000002489
Hovakimian, A., Hovakimian, G., & Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues. Journal of financial economics, 71(3), 517-540. https://doi.org/10.1016/S0304-405X(03)00181-8 DOI: https://doi.org/10.1016/S0304-405X(03)00181-8
La Rocca, M., La Rocca, T., Gerace, D., & Smark, C. (2009). Effect of diversification on capital structure. Accounting & FinanceReview, 49(4), 799-826. https://doi.org/10.1111/j.1467-629X.2009.00304.x DOI: https://doi.org/10.1111/j.1467-629X.2009.00304.x
Lowe, J., Naughton, T., & Taylor, P. (1994). The impact of corporate strategy on the capital structure of Australian companies. Managerial and Decision Economics,15(3), 245-257. https://doi.org/10.1002/mde.4090150306 DOI: https://doi.org/10.1002/mde.4090150306
Marsh, P. (1982). The choice between equity and debt: An empirical study. The Journal of Finance, 37(1), 121-144. https://doi.org/10.1111/j.1540-6261.1982.tb01099.x DOI: https://doi.org/10.1111/j.1540-6261.1982.tb01099.x
Modigliani & Miller. (1958). Capital structure decision making: A model for the family business. Journal of business venturing, 16(3), 285-310. https://doi.org/10.1016/S0883-9026(99)00053-1 DOI: https://doi.org/10.1016/S0883-9026(99)00053-1
Öztekin, Ö., & Flannery, M. J. (2012). Institutional determinants of capital structure adjustment speeds. Journal of financial economics, 103(1), 88-112. https://doi.org/10.1016/j.jfineco.2011.08.014 DOI: https://doi.org/10.1016/j.jfineco.2011.08.014
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x DOI: https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Rapp, M., Schmid, T., & Urban, D. (2012). The value of financial flexibility and payout policy. Technische Universität München, Working Paper. https://doi.org/10.2139/ssrn.2081596 DOI: https://doi.org/10.2139/ssrn.2081596
Shyam-Sunder, L., & Myers, S. C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of financial economics, 51(2), 219-244. https://doi.org/10.1016/S0304-405X(98)00051-8 DOI: https://doi.org/10.1016/S0304-405X(98)00051-8
Sims (2012). How do CFOs make capital budgeting and capital structure decisions? Journal of applied corporate finance, 15(1), 8-23. https://doi.org/10.1111/j.1745-6622.2002.tb00337.x DOI: https://doi.org/10.1111/j.1745-6622.2002.tb00337.x
Sims, C. A. (1999). Domestic currency-denominated government debt as equity in the primary surplus. Paper presented at the Latin American Meetings of the Econometric Society, Cancun, Mexico. August.
Stephan (2017). Corporate Governance and the Dynamics of Capital Structure: New Evidence. Paper presented at the 25th Australasian Finance and Banking Conference.
Thompson and jones. (2016). On corporate capital structure adjustments. Finance Research Letters, 14, 56-63. https://doi.org/10.1016/j.frl.2015.05.016 DOI: https://doi.org/10.1016/j.frl.2015.05.016
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x DOI: https://doi.org/10.1111/j.1540-6261.1988.tb02585.x