Dynamics of Financial Structure Adjustments and Firms' Financial Performance

176 Pages·2016·1.23 MB·English

Dynamics of Financial Structure Adjustments
and Firms' Financial Performance
By
Sohail Amjed

A research thesis submitted to the Department of Management & Social Sciences,
Capital University of Science & Technology, Islamabad
in partial fulfillment of the requirements for the degree of

DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES
(FINANCE)

DEPARTMENT OF MANAGEMENT & SOCIAL SCIENCES
CAPITAL UNIVERSITY OF SCIENCE & TECHNOLOGY
ISLAMABAD
AUGUST 2016

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Copyright© 2016 by Sohail Amjed
All rights are reserved. No part of the material protected by this copy right notice may be reproduced
or utilized in any form or any means, electronic or mechanical, including photocopying, recording
or by any information storage and retrieval system, without the permission from the author.

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Please take certificate from Eng. Khalid and past here

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DEDICATION

This dissertation is dedicated to my beloved family whose prayers always pave the way to success
for me.

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TABLE OF CONTENTS

CHAPTER NO.1 ................................................................................................................................ 1
Introduction ........................................................................................................................................ 1
1.1 Overview ................................................................................................................................... 1
1.2 Implication of Financial Structure ............................................................................................ 5
1.3 Research Gap ............................................................................................................................ 6
1.4 Research Motivations: .............................................................................................................. 9
1.5 Research questions .................................................................................................................... 9
1.6 Research objectives ................................................................................................................. 10
1.7 Significance of the study ......................................................................................................... 10
1.8 Research Contributions ........................................................................................................... 11
1.9 Organization of the dissertation .............................................................................................. 12
CHAPTER NO.2 .............................................................................................................................. 13
Financial environment and Corporate Sector of Pakistan ................................................................ 13
2.1 Financial environment of Pakistan.......................................................................................... 13
2.2 Corporate sector of Pakistan ................................................................................................... 14
2.2.1 Capital markets ................................................................................................................. 18
2.2.2 Equity Market ................................................................................................................... 18
2.2.3 Debt market ...................................................................................................................... 23
CHAPTER NO. 3 ............................................................................................................................. 27
Review of Literature ......................................................................................................................... 27
3.1 Brief Chronology of Important Capital Structure Theories .................................................... 27
3.2 Modigliani-Miller Irrelevance Theorem ................................................................................. 29
3.3 Pecking Order Theory ............................................................................................................. 31
3.4 Agency Theory........................................................................................................................ 33
3.5 Tradeoff Theory ...................................................................................................................... 35
3.5.1 Dynamic Tradeoff Model ................................................................................................. 37
3.5.2 Adjustment towards Target Capital Structure .................................................................. 40
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2.6 Market timing theory .............................................................................................................. 44
2.7 Variables ................................................................................................................................. 45
2.7.1 Estimators of target capital structure ................................................................................ 46
2.8.2 Determinants of Adjustment Speed .................................................................................. 56
2.8 The relationship between capital structure and firm's performance ....................................... 60
2.9 Cost and availability of capital: A global perspective ............................................................ 62
2.9.1 The duality of debt finance ............................................................................................... 63
2.9.2 Capital structure puzzle .................................................................................................... 66
2.9.3 Towards the solution of capital structure puzzle ............................................................. 66
CHAPTER NO.4 .............................................................................................................................. 69
Methodology ..................................................................................................................................... 69
4.1 Research Philosophy ............................................................................................................... 69
4.2 Data and Sampling .................................................................................................................. 70
4.3 Graphical presentation of the model ....................................................................................... 77
4.4 Estimation scheme .................................................................................................................. 78
4.1.1 Variables ........................................................................................................................... 79
4.1.2 Statistical Model ............................................................................................................... 79
4.5 Estimation of Adjustment Speed: ........................................................................................... 83
4.6 Determinants of Adjustment Speed ........................................................................................ 86
4.7 Impact of adjustment speed on financial performance: .......................................................... 87
CHAPTER NO. 5 ............................................................................................................................. 88
Results and discussions .................................................................................................................... 88
5.1 Aggregate Descriptive Statistics: ............................................................................................ 88
5.2 Parameters Estimation ............................................................................................................ 96
5.2.1 Significance of the target Contractual Debt ratio determinants ....................................... 97
5.2.2 Coefficients of Target Long Term Debt ratio ................................................................ 101
5.2.3 Coefficients of target Total Debt ratio ........................................................................... 103
5.3 Capital Structure Adjustment Speed ..................................................................................... 106
5.3.1 Annual Adjustment Speed .............................................................................................. 108
5.3.2 Industry Adjustment Speed ............................................................................................ 111
5.4 Determinants of Adjustment Speed ...................................................................................... 113
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5.5 Impact of Adjustment Speed on Financial Performance ...................................................... 116
CHAPTER NO.6 ............................................................................................................................ 119
Conclusion and recommendations: ................................................................................................. 119
6.1 recommendations .................................................................................................................. 121
6.2 Research Limitations ............................................................................................................ 121
6.3 Future research ...................................................................................................................... 122
References ...................................................................................................................................... 123
APPENDIX-I .................................................................................................................................. 152

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LIST OF TABLES
Title Page No
Table 2.1: Companies registered under Companies Ordinance 1984 16
Table 2.2: Performance of KSE at glance 20
Table 2.3: Number of Listed Companies, fund Mobilized and Total 22
Turnover of Shares in Various Stock Exchanges
Table 2.4: Number of companies issued debt instruments and Amount in 24
Billion Rupees of Debt Securities as on 30th June 2015
Table 4.1: Sector Wise List of Companies in BSA and Selected Sample 73
Table 4.2: List of Variables 79
Table 5.1: Summary Statistics of Variables 89
Table 5.2: Correlation Matrix 92
Table 5.3: Descriptive Statistics of Three Capital Structure Measures 96
Table 5.4: Determinants of Target Contractual Debt to Asset ratio 98
Table 5.5: Determinants of Target Long Term Debt to Asset ratio 102
Table 5.6: Determinants of Target Total Debt to Asset ratio 104
Table 5.7: Annual Capital Structure Adjustment Speed Overall 110
Table 5.8: Capital Structure Adjustment Speed summary statistics of 111
individual economic sectors
Table 5.9: Determinants of Adjustment Speed 114
Table 5.10 Impact of Adjustment Speed on Financial Performance 117

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LIST OF FIGURES
Title Page No
Figure.2.1: Year Wise new Company Incorporation 17
Figure 2.2: Corporate Debt Market at Glance 25
Figure 3.1: Graphical presentation of Tradeoff Model 36
Figure 4.1: Graphical Presentation of the Model 77
Figure 5.1: Average Return on Assets of Corporate Sector over 90
thirteen year period
Figure 5.2: Corporate Sector Long Term Leverage history 93
Figure 5.3: Corporate Sector Contractual Debt history 94
Figure 5.4: Corporate Sector Total Debt history 95
Figure 5.5: Capital Structure Adjustment speed of Overall 109
Figure 5.6: Sector wise annual capital structure adjustment speed 112

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ABBREVIATIONS
CPs Commercial Papers
DCs Domestic Companies
GMM Generalized Method of Moments
ISE Islamabad Stock Exchange
KSE Karachi Stock Exchange
LBO Leverage Buy outs
LSE Lahore Stock Exchange
MBO Management Buy Outs
MNCs Multinational Companies
OTC Over the Counter Market
SBP State Bank of Pakistan
SECP Securities and Exchange Commission of Pakistan
SIC Standard Industrial Classification
SMCs Single Member Company
SMEs Small and Medium Enterprises
TFCs Term Finance Certificates
TSLS Two-Stage Least Squares

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