B: Mr. Abdul Khaliq Pervaiz Memon Um-e-salma Ghulam 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.FactorExpected Sign Main Theory/ Weak SupportProxy 1ProfitibilityNegativePecking Order Net Income / Total Assets 2SizePositive Bankruptcy Cost Theory / Tradeoff TheoryLog of Sales 3TangibilityPositive Myers Version of Tradeoff Theory Fixed Assets / Total Assets 4 Growth OpportunitiesPositive Pecking Order Annual Percentage Change in total assets 5Tax RatePositiveMM & TradeoffTax Rate 6RiskNegativePecking Order Deviation from Mean

 Balance Sheet Analysis of SBP  Data of 16 Firms from Food & Personal Care sector Listed at KSE was taken from year  Pooled Regression Analysis, constant coefficient model is employed ignoring time and cross-sectional influence.  However, GSL method is employed to eliminate heteroscadisticity.

No.FactorExpected SignObserved Sign 1ProfitibilityNegative 2SizePositive 3TangibilityPositiveNegative 4GrowthPositive 5Tax RatePositiveNegative 6RiskNegative

 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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