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Capital structure

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Research on capital structure

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Capital structure

  1. 1. Financial leverage INTRODUCTION: Financial Leverage isthe extentordegree towhichthe company’stotal capital iscomposed of Debt.You’ve probablyheardthe termbefore,leverage,butwhatexactlydoes itmean? Anothertermisgearing.Sowhenyouuse this,youare alsodoingwhat can be called gearing.Inessence meansusingthe resourcesthatare available tomagnifythe positive or negative aspectinthe final productorresult. Usuallywhenyoudothistype of dealinginbusinessorfinance,itissimilarorsynonymous withborrowing.ThisgreatlyinvolvesROA (returnonassets) andROE(returnon equity).The mainpointisto make ROE higherthanthe ROA.If itis not,leverage orborrowingcanbe used. 1.2 ResearchProblem The study of leverage effectonStockReturniscrucial to understandthe behaviorof stock& Its Returnthat textilesectorof Pakistanexperience intheirdailyactivities.Different companiesselectedfordetailedanalysisfor the period2008 to December2011. 1.3 Objective of Study The objective of thisstudyistocriticallyexaminethe possible effectsthata firm’s • To check the impactof leverage onstockreturntextilesectorof Pakistan. • Textile Sectorshave beenselectedforthe purpose inPakistan,the analysisof leverage effectwouldfocusonthem.The time periodisspreadover5 years(2008 to 2012). 1. LITERATURE REVIEW: Hamada (1972) and Rubinstein(1973) demonstrate thata firm’sbetashouldincrease if the firmfinancesmore heavilywithdebt.Thesetheoriesare extensionof the pre-CAPMworkof Modigliani andMiller(1969),whoshow that use of debtincreasesequityreturnvariability. In hisanalysisof marketrisk,Hamadaconcludesthat21 percentto 24 percent of a firm’s systematicriskcouldbe explainedbythe nature of itsfinancing.Hamada(1972) and Rubinstein(1973) demonstrate thata firm’sbetashouldincrease if the firmfinancesmore heavilywithdebt. 2. METHODOLOGY 3.1 DATA COLLECTION: Secondarydata forthe purpose has beencollectedfromKarachi stockexchange,Annual reports,Finance books,Moreoversome informationwascollectedfromdifferentwebsites. The annual data of firmsistakenfromthe variousissuesof “Balance SheetAnalysis” published byState Bankof Pakistan 3.2 PROCEDURE: Annual reports of selectedcorporations have beencollectedfrom the industries and retrievedthe required information. The stockprices of four years (2008, to 2011) of selectedindustries have beengatheredfrom their websites. The totaltime ofdata collectionwas almost three to four weeks includedonlysecondarydata. 3.4 VARIABLE 3.4.1 Dependant The dependantvariable inthisresearchisstockreturn. 3.4.2 Independent The independentvariable isleverage, currentratios,stockprices.
  2. 2. Financial leverage CONCLUSION: As the researchhasbeenconductedwe foundthatotherthenSystematicRiskthere are some factors whichcan alsoaffectthe return.We studiedthe CAPMmodel whichhasbeencriticizedlateronbecause of notconsideringsome othervariableswhichcanalsocontribute indeterminingthe stockreturn. Amongthose variablesonlyleverageeffectstudiedhere.Thisresearchpaperfoundthatthere is significantlypositiveeffectof Leverage onstockreturninHighleverage portfolioandsignificantly negative effectinlowerleverageportfolio,we concludedsuchdifferenceswhichoccurinvarious portfolioof Pakistani marketbecauseof inefficientmarket. 4 REFERENCES: Bae,BenjaminandH. Sami,(2005). The effectof potential environmental liabilitiesonearningsresponse coefficients,JournalofAccounting,Auditing&Finance,20(1) 43-70. Billings.B.,(1999).Revisitingthe relationbetweenthe doubtful riskof debtandthe earningresponse coefficient,the Accounting Review,74(October),509-522. Black,F. (1976). Studiesof StockMarketVolatilityChanges.Proceedingsof the AmericanStatistical Association,BusinessandEconomicStatisticsSection,77-81. Bowman,R. G. (1979). The Theoreticà7RelationshipBetweenSystematicRiskandFinancial (Accounting) Variables,Journal off mnance,(34)3,617-630. Chambers,D J.,R N. FreemanandA S. Koch,(2004). The effectof riskonprice responsestounexpected earnings,Journal of Accounting,Auditing&Finance 20(4),

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