Relationship Between Capital Structure and Ownership Structure: a Comparative Study of Textile and Non Textile Manufacturing Firms

In: Business and Management

Submitted By Muhammadarslan73
Words 7578
Pages 31
Public Policy and Administration Research ISSN 2224-5731(Paper) ISSN 2225-0972(Online) Vol.4, No.11, 2014

www.iiste.org

Relationship between Capital Structure and Ownership Structure: A Comparative Study of Textile and Non Textile Manufacturing Firms
Muhammad Arslan* M.Phil (Management Sciences) Bahria University Islamabad, Pakistan, PO box 44000, E-8, Islamabad, Pakistan Email: MuhammadArslan73@gmail.com Rashid Zaman M.Phil (Management Sciences), Bahria University Islamabad, Pakistan Email: Rashidzamantanoli@gmail.com Abstract The current study explores the impact of ownership structure on capital structure in textile sector and rest of the manufacturing sectors (non-textile) in Pakistan using regression analysis with fixed effect model. As textile sector is the largest manufacturing sector in Pakistan and having diversified financial characteristics, however, there exists a gap whether textile sector’s ownership and capital structure relationship matches with other manufacturing sectors or not. Current study tries to fill this gap. The results indicate that in textile sector, no significant relationship exists between ownership concentration and capital structure whereas a significant negative relationship is found between these two variables in case of non-textile firms in Pakistan. However, institutional ownership variable was found to be non-significant in both textile and non-textile sectors. Other control variables were found to have the results as hypothesized. Period of study used in this study is 2006-2009 and sample comprises of KSE listed firms. Keywords: Ownership concentration, capital structure, institutional shareholding. INTRODUCTION The capital structure refers to the optimal mix of debt and equity financing structure used by a firm to support its financing needs. Literature supports the notion that an optimal capital structure can have a positive…...

Similar Documents

Capital Structure

...CapStrMktPower I M Pandey CAPITAL STRUCTURE AND MARKET POWER I. M. Pandey Indian Institute of Management Ahmedabad Vastrapur, Ahmedabad 380015 India E-mail: impandey@iimahd.ernet.in W. P. No. 2002-03-01 March 2002 i CapStrMktPower I M Pandey CAPITAL STRUCTURE AND MARKET POWER I M Pandey ABSTRACT This paper provides new insights on the way in which the capital structure and market power and capital structure and profitability are related. We predict and show that capital structure and market power, as measured by Tobin’s Q, have a cubic relationship. That is, at lower and higher ranges of Tobin’s Q, firms employ higher debt, and reduce their debt at intermediate range. This is due to the complex interaction of the market conditions, agency problems and bankruptcy costs. We also show saucer-shaped relation between capital structure and profitability because of the interplay of agency costs, costs of external financing and debt tax shield. To our knowledge, we are the first to uncover these results. Key words: capital structure; market structure; market power; Tobin’s Q; riskshifting; moral hazard; agency problems; pecking order; trade-off theory; asset substitution. ii CapStrMktPower I M Pandey CAPITAL STRUCTURE AND MARKET POWER INTRODUCTION In corporate finance, works of Modigliani and Miller (1958; 1963) about capital structure irrelevance and tax shield advantage paved way for the development of alternative theories and a series of...

Words: 6718 - Pages: 27

Ownership Structure and Firm Performance

...Changing ownership and its impact on Firm performance: A detailed pre and post crisis study on Indian firms Several studies are available establishing relationship between firm performance and ownership structure and the results are mixed. Several authors have found significant relationship while others have not found any significant relationships. In Indian context also, there are several studies which propagates to have both kind of results. The way literature is linking the owner ship with performance has always been via addressing the agency (outsiders and insiders) problem, board structure, size, leverage etc. but, literature is sparse to identify these variables as moderating the relationship between ownership and firm performance. The purpose of this study is to establish and study the relationship between ownership and performance in Indian context. Considering following points, I recommend a framework to study the changing ownership and firm performance under the premise that agency costs and information asymmetry acts as moderating variable, which increases/decreases performance when ownership changes. * In India, it is confirmed by several authors that concentrated and complex ownership structure is found which creates problem of heterogeneity and opacity. * India has agency type 2 problems; few studies are available addressing type 2 problem and variables to measure this. * Opacity and complexity creates Information asymmetry and tunneling......

Words: 1842 - Pages: 8

Capital Structures of Family Businesses

...found similar statistics for family firms around the world (Dreux, 1990; Martinez, 1994; Owens, 1994). Therefore, a better grasp of the unique characteristics of family firms is a basis for understanding a significant part of the world’s economy several papers have been written about the unique characteristics of family businesses and their performance compared to that of non-family businesses. Most research done in the field focused on corporate governance measures, family relationships, succession, and performance indicators of family owned businesses. This research article also deals with capital structure & performance of family businesses in India. Article 1: (Kim & Gao) Does Family involvement increase business performance Family involvement in business management attracts much scholarly attention in the field of family business. This paper's main objectives are answering two questions. They are 1) how does family involvement in management affect firm performance? 2) Is the relationship between FIM & Firm performance contingent on a firms goals? This study defines family business as a firm owned and managed by a family or family clan (litz, 1997). This study employs snowball sampling as it is difficult, the study also asked the respondents to indicate whether the firm was owned and managed by a family through a questionnaire. To address the research questions mentioned above, the study uses 158 family firms in China as a context in which to......

Words: 7493 - Pages: 30

Vietnam’s Textile Industry

...This paper seeks to look at Vietnam’s economy, financial sector, and political sector in respect to the textile industry. In an attempt to evaluate the feasibility of entering a foreign market, we focus our paper on a mid-sized company called Augusta Textile Company. This paper seeks to evaluate Vietnam’s potential for investment, particularly in the textile industry. While the company seeks to increase revenues and keep costs of production low, the company must look to expand to growing markets. However, various risks must be taken into consideration, as they can be great barriers to entry. The company looks to expand with the least financial risk, but greatest potential output and revenue. In evaluating the textile industry in Vietnam, as well as potential modes of entry, we may conclude a recommendation for Augusta Textile Industry’s future potential expansion. Introduction Country Basics Vietnam is formally known as the Socialist Republic of Vietnam and is located in the South China Sea. It is the thirteenth most highly populated country in the world (Hossain, 2010). The current population of Vietnam is estimated at about 90.4 million (The Heritage Foundation, n.d.). There are 54 officially recognized ethnic groups in Vietnam, but the majority are Viet (also known as “Kinh”), comprising of about 86% of the total population. Other significant ethnic groups are the Tay, Thai, Muong, Khome, and Hoa. The vast majority of the Vietnamese population speaks the Vietnamese...

Words: 7093 - Pages: 29

Working Capital Management in Textile Industries

...1. INTRODUCTION * The project focuses on the importance of financial analysis for the company as financial Statements are useful as they provide information that allows investors and creditors to make better decisions. However, because of selective reporting of economic events as well as non-comparable accounting methods and estimates, financial statements are only an approximation of reality. In addition, because of the tendency to delay accounting recognition, financial statements also tend to lag reality. * A primary objective of financial analysis is to determine comparable risk and return of companies and their securities. Financial statements include the * Balance Sheet * Income Statement * Cash Flow Statement * The financial statements are interrelated and are used and analysed together. Methods of financial statement analysis are divided into two general categories, internal analysis and comparative or external analysis. * Internal analysis uses figures from the financial statements of any one date or period to gain an understanding of the customer. Comparative analysis is used to determine trends when two or more successive sets of figures are reviewed, or is used to evaluate the company's financial statement against industry standards. * These methods are used separately or in combination. They are part of the tools that enable experienced credit professionals to reach a credit decision. Financial......

Words: 13940 - Pages: 56

Capital Structure

...Capital Structure Stewart C. Myers The Journal of Economic Perspectives, Vol. 15, No. 2. (Spring, 2001), pp. 81-102. Stable URL: http://links.jstor.org/sici?sici=0895-3309%28200121%2915%3A2%3C81%3ACS%3E2.0.CO%3B2-D The Journal of Economic Perspectives is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aea.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR,......

Words: 12907 - Pages: 52

Capital Structure

...107Á123, March 2008 Performance and Capital Structure of Privatized Firms in Europe ´ ´ MARIA JOSE ARCAS & PATRICIA BACHILLER Faculty of Economics and Business Administration, Department of Accounting and Finance, University of Zaragoza, Zaragoza, Spain ABSTRACT The objective of this paper is to analyze whether there are differences in performance between private firms and recently privatized firms in the European Union, as well as to determine whether ownership (state-owned versus private) and regulation affect capital structure. Focusing on economic reasons that justify privatizations, we analyze whether there are differences between recently privatized state-owned enterprises (SOEs) and private firms in their profitability, leverage and efficiency during the period 1999Á2002. Also, we analyze the determinants of the capital structure of these firms. Contrary to previous studies, our results show that privatized firms are not less efficient than firms with private ownership. KEY WORDS: Privatization, efficiency, capital structure, regression, Wilcoxon test Summary In recent decades, the privatization of state-owned enterprises (SOEs) has been one of the most common policies carried out in economies worldwide and the Organization for Economic Cooperation and Development (OECD) countries have also been involved in this phenomenon. Many studies have focused on the impact of privatization on the performance of the privatized firms, but results are not conclusive.......

Words: 7717 - Pages: 31

Capital Structure

...Perceived Relationship between Corporate Capital Structure and Firm Value in Nigeria Semiu Babatunde ADEYEMI Department of Accounting University of Lagos Lagos, Nigeria Collins Sankay OBOH Department of Accounting University of Lagos Lagos, Nigeria Abstract This study examined the empirical effects of corporate capital structure (financial leverage) on the market value of a selection of firms listed on the Nigerian Stock Exchange. Both primary and secondary data were obtained for analysis employing both descriptive and inferential statistics for analysis. A sample size of 150 respondents and 90 firms were selected for both primary data and secondary data respectively. Descriptive statistics was used to analyse the primary data, while Chi-Square was used to draw inference of perceived relationship between capital structure and firm value. The results of the study suggested that a positively significant relationship exists between a firm’s choice of capital structure and its market value in Nigeria. The study suggested that listed firms in Nigeria should strategically plan and manage their capital structure in order to maximize their market values. Keywords: Capital structure, market value, Nigeria, debt, equity. 1. Introduction 1.1 Background to the Study After the Modigliani-Miller (1958 and 1963) paradigms on firms’ capital structure and their market values, there have been considerable debates, both in theoretical and empirical researches on the nature of relationship......

Words: 7951 - Pages: 32

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure

...Journal of Financial Economics 3 (1976) 305-360. Q North-Holland Publishing Company THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE Michael C. JENSEN and William H. MECKLING* University of Rochester, Rochester, NY 14627, U.S.A. Received January 1976, revised version received July 1976 This paper integrates elements from the theory of agency. the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optirnality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing tht- creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frcqucntly watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give thcmsclvcs a dispensation from...

Words: 27266 - Pages: 110

Working Capital Management of Square Textile Limited

...Working Capital Management of Square Textile Limited Introduction: This report focuses on the working capital management of a reputed textile firm of Bangladesh. In this regard, we have selected Square Textile Ltd. We tried to link our findings in working capital in Square Textile Ltd. and theoretical aspects. We have found some similarities and some dissimilarity in this regard. We have particularly pointed in the inventory management, liquidity management and credit policy of the company. Overall working capital management of square textile has been stated in detailed. Objectives of the Study: The purpose of the study is to analyze the working capital management practices of Square textile ltd. THEORETICAL OVERVIEE There are different theoretical developments and empirical issues but there is no unified rule that can determine the optimal level of working capital. From the viewpoint of developing country like Bangladesh the role of working capital should be highly emphasized. Working Capital Management The second function involves the capital structure and dividend issues. The third one deals with management of working capital or current assets and current liability management issues. The working capital of a firm includes: a) Current Assets b) Current Liability Approaches of Working Capital Management • Conservative Approach • Matching Approach • Aggressive Approach Necessity of working capital Current Assets & Liabilities. But in real world......

Words: 3172 - Pages: 13

A Study of the Relationship Between Corporate Governance Structures and the Extent of Voluntary Disclosure

...Journal of International Accounting, Auditing & Taxation 10 (2001) 139 –156 A study of the relationship between corporate governance structures and the extent of voluntary disclosure Simon S.M. Ho*, Kar Shun Wong School of Accountancy, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong Abstract The primary objective of this study is to test a theoretical framework relating four major corporate governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong. These corporate governance attributes are the proportion of independent directors to total number of directors on the board, the existence of a voluntary audit committee, the existence of dominant personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East Asia for implementing the two new board governance requirements on audit committee and family control. © 2001 Elsevier Science Inc. All rights reserved. Keywords: Corporate disclosure; Corporate governance; Voluntary disclosure; Hong Kong 1. Introduction It is commonly......

Words: 7994 - Pages: 32

Impact of Working Capital in Textile Firms Profitability

...2015 WORKING CAPITAL MANAGEMENT AND PROFITABILITY IN SUGAR INDUSTRY OF PAKISTAN Muhammad Ehsan Javaid Leghari PhD Management Sciences COMSATS Institute of Information Technology Islamabad, Pakistan Email:muhammadehsanjavaid@yahoo.com ABSTRACT Working capital management is necessary for profitability. In this study working capital management of sugar industry and its impact on profitability is checked from 2002 to 2012. Total observations are 308 while 28 companies listed at Karachi Stock Exchange are in sample. Correlation and pooled panel data regression analysis is performed. Results show that day’s inventory, cash conversion cycle, cash ratio, account receivable to sale ratio, short term investment ratio, secured short term obligation and fixed asset ratio are negatively affecting profitability of firm. Whereas quick ratio, days account receivable and working capital are positively affecting profitability. Key words: Return on Asset, Cash Conversion Cycle, Secured Short Term Obligations, Cash Ratio, Account Receivable to Sale INTRODUCTION In finance field two extensively examined areas are capital structure and working capital management. It is matter of great importance both for researchers and corporate individuals to figure out firm’s value and profitability. Working capital management has a direct impact on the firm profitability along with reducing the liquidity risk. Liquidity is one face of coin and profitability is other. It clarify that working capital......

Words: 2867 - Pages: 12

Performance of Textile Industry in Industrialisation: a Study with Reference to India

...PERFORMANCE OF TEXTILE INDUSTRY IN INDUSTRIALISATION: A STUDY WITH REFERENCE TO INDIA INTRODUCTION Prosperity of any nation is extremely difficult without industrial development – is a well established truth for all the economies – developing or developed. Economic development and industrialization have became so closely integrated with each other that progress of an economy is now accessed from the success it has achieved in transformation from agricultural set up into a industrial set up. Through industrialization a situation is created whereby many industries are set up rapidly and ultimately backward areas are converted into economically developed areas and backward economies into developed economies. Industrialization, infact is a composite term which involves a number of structural changes such as changes in the production techniques, factor intensities, industrial employment and output. Industrialization is not only a way to increase output or national income but is a means of introducing modern technology and changing ways of life and finally the structure of the economy because of its self-reinforcing quality. But the all above cannot be executed without a well planned industrial policy. The industrial polity provides direction to the pace of industrialization and industrial development. Hence, to industrialize the country, India too, framed industrial policy which was amended, modified and reoriented several times. The First Industrial Policy was framed in......

Words: 6332 - Pages: 26

Capital Structure

...Bachelor of Finance & Banking Thesis -------------------------------------- The impact of capital structure on profitability of listed construction companies on Hanoi Stock Exchange from 2008 to 2013 FALL 2014 Instructor Mr. Tran Viet Dung Group members Nguyen Thi Thanh Tam (FB00464) Nguyen Thi Viet Chinh (FB00405) Hoang My Linh (FB00073) Dang Thi Hong Hanh (FB00253) Nguyen Thi Kieu Trang (FB00078) Hanoi, December 2014 Table of Contents List of tables 3 List of figure 4 Abstract 5 Chapter 1: Introduction and Thesis Outline 6 1. Background 6 2. Research objective 8 3. Research question 8 4. Data and methodology 8 4.1 Data 8 4.2 Methodology 9 5. Thesis outline 9 Chapter 2: Literature Review and theoretical models 10 1. Theorem review 10 1.1. Modigliani- Miller theorem review 10 1.2. Agency theory 12 1.3. Trade-off theory 14 1.4 Pecking Order Theory 19 1.5 Market-timing theory 20 2. Variable review 22 2.1. Return on Asset and Return on Equity 22 2.2. Capital structure 23 3. Empirical studies 24 3.1. Relationship between capital structure and firm performance 24 3.2. Empirical studies of relationship between determinants of capital structure and profitability 28 4. Summary of the empirical studies 30 Chapter 3: Methodology 31 1. Introduction 31 2. Data collection methods 32 2.1. Sampling techniques 32 2.2. Data collection procedure 34 3. Variables and......

Words: 20311 - Pages: 82

Firm Valuation and Optimal Capital Structure

...financial data the following questions: 1. What is the name of the company? What is the industry sector? 2. What are the operating risks of the company? 3. What is the financial risk of the company (the debt to total capitalization ratio)? 4. Does the company have any preferred stock? 5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding? 6. What is the company’s current actual Beta? 7. What would the Beta of this company be if it had no Long Term Debt in its capital structure? (Apply the Hamada Formula.) 8. What is the company’s current Marginal Tax Rate? 9. What is the Cost of Debt, before and after taxes? 10. What is the Cost of Preferred Stock (if any)? 11. What is the Cost of Equity? 12. What is the cash dividend yield on the Common Stock? 13. What is the Weighted Average Cost of Capital of the company? 14. What is the Price Earnings Multiple of the company? 15. How has the company’s stock been performing in the last 5 years? 16. How would you assess the overall risk structure of the company in terms of its Operating Risks and Financial Risk (Debt to Capitalization Ratio)? 17. Would you invest in this company? Why? Or Why not? 18. The last page of your paper should be a Bibliography of the sources you used to prepare this paper. Select an industrial or commercial......

Words: 1858 - Pages: 8