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.
Factor
Expected Sign
Main Theory/
Weak Support
Proxy
Net Income / Total
Assets
1Profitibility
Negative
2Size
Positive
Pecking Order
Bankruptcy Cost
Theory / Tradeoff
Theory
Positive
Myers Version of
Tradeoff Theory
Fixed Assets / Total
Assets
3Tangibility
Log of Sales
Growth
4 Opportunities
Positive
Pecking Order
Annual Percentage
Change in total
assets
5Tax Rate
Positive
MM & Tradeoff
Tax Rate
Pecking Order
Deviation from
Mean
6Risk
Negative
 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.
Thank you very much for your
patience listening and valuable
feedback