Capital Structure

Attributes that effect on capital structure

An Empirical study in context of under developing countries like
Pakistan
Submitted By:
M. Imran Ali (BCH-10229)
Submitted To:
Prof. Shafaat Saif
07-06-2013
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DECLARATION OF ORIGINALITY
I hereby certify that I am the sole author of this thesis and that no part of this thesis
has been published or submitted for publication. I certify that, to the best of my
knowledge, my thesis does not infringe upon anyones copyright nor violate any
proprietary rights and that any ideas, techniques, quotations, or any other material
from the work of other people included in my thesis, published or otherwise, are
fully acknowledged in accordance with the standard referencing practices. I declare
that this is a true copy of my thesis and that this thesis has not been submitted for a
higher degree to any other University or Institution.
Signature: ..
Date: ..
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ACKNOWLEDGEMENT
First of all we are thankful to one and only the Almighty Allah and his Prophet
Mohammed (PBUH) for always guiding us in the thick and thin and giving us
strengths and courage to complete this project, without them nothing would have
been possible. I owe my deepest gratitude and warmest appreciation to all those
people who helped during our dissertation. I would never have been able to finish
without the guidance, advices and support. Their kindness is much indeed
appreciated. In the first place, I would like to thanks to our teacher Prof. Shafaat
Saif which not only provide us Opportunity to do this thesis but also paid a Fair
attention to do it. Their excellent patience and guidance have provided us an
excellent atmosphere for doing our thesis. Then I would like to thank my parents
whose prayers and support have always been influential in our lives. Finally I
would like to thank all the people who directly or indirectly helped us out in this,
and a thank you goes to the organizations whose data we used in this project as
well.
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DEDICATION
This thesis is dedicated to my parents who have supported me all the way since the
beginning of my studies. Also, this thesis is dedicated to my brother who has been
a great source of motivation and inspiration, my friends who have given me their
fullest help, support and encouragement throughout the completion of this thesis.
And finally this thesis is dedicated to all those who believe in the richness of
learning Thank You.
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ABSTRACT
The present study aims to determine that attributes that effect on capital structure. My research is
related to finance and economics. The sector of my research is Banking and Business Sector. My
research is based on those factors that effect on capital structure. I research in Pakistan so that
my research is beneficial for Banking and business sector of Pakistan. For this research I search
the 50 different articles, Books and reports. I collect the data through annual reports of bank. I
take five commercial banks and take the last 5 years data. The total variable of my research is
five in which four are independent variable that is provision ratio, equity, fixed assets and
dividend and one is independent variable that is capital structure. This study is expected to
contribute to the literature and practice by examining an under researched area in an under
researched context. This study will be guideline for all banking sector and businessmen.
Contents
Chapter NO 1:..................................................................................................................................8
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Introduction......................................................................................................................................8
1.1Historical Background:...........................................................................................................8
1.2 Purpose of the study:............................................................................................................11
1.3 Objective of the Study:.........................................................................................................11
1.4 Significance of the study:.....................................................................................................12
1.5 Research Question:..............................................................................................................12
Question Type:........................................................................................................................12
1.6 Model:..................................................................................................................................13
1.7 Hypothesis:...........................................................................................................................13
Chapter No 2..................................................................................................................................14
Literarture Review.........................................................................................................................14
2.1 Literature Review Flow Model:...........................................................................................14
2.2 Literature Review:................................................................................................................16
Chapter Number 3:........................................................................................................................33
Data & Methodology.....................................................................................................................33
3.1 Research Paradigm:..............................................................................................................33
3.2 Research Approach:.............................................................................................................33
3.3 Population and Sampling.....................................................................................................33
3.4 Data & Instrumentation:.......................................................................................................34
3.5 Data Analysis:......................................................................................................................34
3.5.1Frequency table:.............................................................................................................34
3.5.2 Bar chart:.......................................................................................................................34
3.5.3 Five figure summary:....................................................................................................34
3.5.4 Histogram:.....................................................................................................................35
3.5.5 Scatter plot:....................................................................................................................35
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3.5.6 Pearson correlation:.......................................................................................................35
3.5.7 Spearmen correlation:....................................................................................................35
3.5.8 Single regression:..........................................................................................................35
3.5.9 Multiple regressions:.....................................................................................................36
3.6 Limitations and Delimitations:.............................................................................................36
3.7 Ethical Consideration:..........................................................................................................37
Chapter Number 4:........................................................................................................................38
Result and Analysis........................................................................................................................38
4.1 Mean Median and Mode:.....................................................................................................38
4.2 Pool unit Root test (Dividend variable):..............................................................................39
Pool unit root test (Equity):........................................................................................................40
4.3 Pool unit root test (Fixed assets):.........................................................................................41
4.4 Pool unit root test:................................................................................................................42
4.5 Regression Test:...................................................................................................................43
4.6 Regression test:....................................................................................................................45
Chapter NO 5:................................................................................................................................46
Discussion and conclusion.............................................................................................................46
5.1 Discussion:...........................................................................................................................46
5.2 Conclusion:..........................................................................................................................49
5.3 Recommendation:................................................................................................................50
References......................................................................................................................................51
Appendixes....................................................................................................................................54
CHAPTER NO 1
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INTRODUCTION
1.1Historical Background:
The topic which I research attributes that effect capital structure. The topic is related about
finance. There are many researchers work on this topic in Pakistan and other countries. The
sector of my research studies is banking and business sector. This studies for all sole proprietor
and partnership businesses. There are four major factors that affect the capital structure these are
provision ratio, fixed assets, equity and dividend. Instead there are many more factors that effect
on capital structure but these are important factors. According to a (Sheridan titman) is a famous
researcher about the capital structure means the mixture of share capital and other long term
liabilities. In the company, we know that liability of each shareholder is limited but how much be
the total liability of shareholder is the important question? It can be decided by choosing best
capital structure. In capital structure, we include equity share capital, preference share capital,
debenture and long term debt. Suppose, our company's capital structure may show 50% equity
share capital, 30% pref. shares capital and 20% debentures. But all companies' capital structure
may not be equal because different business needs different type of capital structure which will
be suitable according to the need of business.
According to the researcher (Sergey Tsyplakov) about the capital structure is defined by the
firms policy with regard to leverage and dividend payments. It is of major importance in
corporate governance because it can determine the incentives of managers and thereby the
economic efficiency of the corporations they manage. Capital structure is a term that describes
how much of each financing source the business is utilizing. Determining the right mix of equity
and debt financing is critical for the success of a small business. It is argued that the modern
theories of capital structure began with the seminal paper of Modigliani and Miller (1958) and
also search another researcher Rajan and Zingales, (1995). According to the researcher Harris &
Ravi in 1995 what then was the main message that MM delivered. In brief, the MM proposition
states that the value of a firm is independent from its corporate financing decisions under certain
conditions. In fact, MM pointed out the direction that capital structure theories must take by
showing under what conditions capital structure is irrelevant.
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According to the researcher (Ivo Welch) they observed that two common problems in capital
structure research. First, although it is not clear whether non financial liabilities should be
considered debt, they should never be considered as equity. Yet, the common financial debt to
asset ratio (FD/AT) measure of leverage commits this mistake. Thus, research on increases in
FD/AT explains, at least in part, decreases in non financial liabilities. Future research should
avoid FD/AT altogether. The paper also quantifies the components of the balance sheet of large
publicly traded corporations and discusses the role of cash in measuring leverage ratios. Second,
equity issuing activity should not be viewed as equivalent to capital structure changes.
Empirically, the correlation between the two is weak. The capital structure and capital issuing
literature are distinct.
There are many researchers which describe the determinants of capital structure. According to
the researcher (Roberto Wesels) analyze in his article the explanatory power of some of the
recent theories of optimal capital structure. The study extends empirical work on capital structure
theory in three ways. First, it examines a much broader set of capital structure theories, many of
which have not previously been analyzed empirically. Second, since the theories have different
empirical implications in regard to different types of debt instruments, the authors analyze
measures of short-term, long-term, and convertible debt rather than an aggregate measure of total
debt. Third, the study uses a factor analytic technique that mitigates the measurement problems
encountered when working with proxy variables.
The first factor which is effect is provision ratio. It is the important factor any company.
According to the (economic development) In general, the value of a loan recorded on the balance
sheet is equal to the banks recorded investment the amount outstanding or face value, less a
provision for bad and doubtful debts. The need to create provisions arises because the loans are
not recorded at market value, typically because imputed market values are either empirically
difficult to obtain due to an absence of traded markets or they rely on judge mental assumptions.
For assets valued at market prices, as a first approximation all changes in value would be
unexpected, 74 and there would be no need to create provisions against expected losses.
The second factor is fixed assets which are also directly effect on capital structure. According to
the researcher (Erasmo Giambona) the effect of asset tangibility on capital structure by
exploiting variation in the salability of corporate assets. We do so using an instrumental variables
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approach that incorporates measures of supply and demand for different types of tangible assets
(e.g., machines, land and buildings). Theory suggests that tangibility matters because it allows
creditors to more easily repossess a bankrupt firms assets. However, tangible assets are often
illiquid and hard to redeploy. Our study shows new evidence that the redeploy ability of tangible
assets is a key determinant of firm capital structure (beyond standard measures of tangibility).
Consistent with a credit supply side view of capital structure, we find that asset redeploy ability
is a particularly important driver of leverage for firms that are more likely to face credit frictions
(small, unrated, and low payout firms). Additional tests show that asset redeploy ability
facilitates borrowing the most during periods of tight credit in the economy. Our findings are
consistent with capital structure models of contract incompleteness and limited enforceability.
Equity is also effect on capital structure. Its a ownership of an company so its effect on a large
scale on capital structure. The existence of individual equity options publicly traded corporate
bonds and credit default swap (CDS) contracts affects equity market quality for a panel of
NYSE-listed firms during 2003-2007. We find that firms with listed equity options have more
liquid equity and more efficient stock prices. By contrast, firms with traded CDS contracts have
less liquid equity and less efficient stock prices, especially when these firms or their capital
structures are complex hard to value. The impact of having a publicly traded bond market is
somewhat mixed; however, we observe a signicantly negative role for all trading activity in the
related markets in both bonds and options for efficiency and liquidity. Taken together, these
results imply an overall negative effect of related markets when those markets are tied to debt in
a firm's capital structure
The last attribute is dividend which is also impact on capital formation. An important part of
your investment return is dividends. Usually a cash payment to shareholders, dividends are most
often paid on a quarterly basis. When the performance of dividend paying stocks is compared to
non-dividend-paying stocks, the difference from total return perspective capital appreciation Add
dividends can be quite surprising. But keep in mind that not all companies pay out dividends.
Some keep all of their profit and reinvest it back into the company, while others pay out a portion
to shareholders.
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1.2 Purpose of the study:
The purpose of my research study is to attributes that effect capital structure. In my research i
study about the factors which effects on capital structure. These variables are provision ratio,
fixed assets, equity and dividend. I study about these factors and their affect on capital structure.
Instead I research that about the capital structure and how a firm finances its overall operations
and growth by using different sources of funds. This study is doing in Pakistan so the benefits for
the Pakistan organizations and banking sector.
1.3 Objective of the Study:

The objective of the study is examine the relationship between all variables
To examine the impact of provision ration on capital structure.

To examine the impact of fixed assets on capital structure.
To examine the impact of equity on capital structure.
To examine the impact of dividend on capital structure.
1.4 Significance of the study:

In significance I describe the importance of my topic and variables are described below:
The study will be help in literature contribute.

The study will be important for Banking and Business sector.
Its make the policies.
My study will be important for all multinational and national companies which operating
in Pakistan.
My research study is important for those people who can take the loan and pay heavy
interest.
My research study will, be important for make good financial position in company.
My research study is importance to manage the capital.
My research study will be important how can use the fixed assets in company.
The realize that the fixed assets is important part of any company.
My research study is important for shareholders of company.
My research study important for jobholders.
The study will be important for the investors to invest their money in bank or
organization.
My research study is importance for sole proprietorship and partnership business.
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This study will be used by the economist of the country to improve the economic
condition of Pakistan.
1.5 Research Question:

What are the attributes that effect on capital structure?
Question Type:
The type of my research question is that Associational Research Question.
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1.6 Model:
Provision
Ratio
Capital
Fixed assets
structure
Equity
Dividend
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1.7 Hypothesis:
H1= There is a relationship between provision ratio and capital structure.
H0= There is no relationship between provision ratio and capital structure.
H2= There is a relationship between fixed assets and capital structure.
H0= There is no relationship between fixed assets and capital structure.
H3= There is a relationship between Equity and capital structure.
H0= There is no relationship between equity and capital structure.
H4= There is a relationship between dividend and capital structure.
H0= There is no relationship between dividend and capital structure.
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CHAPTER NO 2
LITERARTURE REVIEW
2.1 Literature Review Flow Model:
Introduction
Provision ratio
Fixed assets
Equity and
Dividend and
Provision ratio, fixed
and Capital
and capital
capital
capital
assets, equity, and
Structure
structure
structure
structure
dividend and capital

structure
Summary
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2.2 Literature Review:
2.2.1 The role of capital structure:
The researcher analyze that the importance of firm specific and country specific factors in the
leverage choice of firms from 42 countries around the world. Our analysis yields two new
results. First, we find that firm-specific determinants of leverage differ across countries, while
prior studies implicitly assume equal impact of firm-specific factors. Second, although we concur
with the conventional direct impact of country specific factors on the capital structure of firms,
we show that there is an indirect impact because country specific factors also influence the roles
of firm specific Determinants of leverage. A firms capital structure is not only influenced by
firm specific factors but also by country specific factors. In this study, we demonstrate that
country specific factors can affect corporate leverage in two ways. On the one hand, these factors
can influence leverage directly. For example, a more developed bond market facilitating issue
and trading of public bonds may lead to the use of higher leverage in a country, while a
developed stock market has the opposite effect. On the other hand, we show that country specific
factors can also influence corporate leverage indirectly through their impact on firm specific
factors roles. For example, although the developed bond market of a country stimulates the use
of debt, the role of asset tangibility as collateral in borrowing will be rather limited for firms in
the same country. (Jong, Kabir, & Nguyen, 2007).
According to the researcher the capital structure choices of high tech firms in the last decade and
how these choices relate to current capital structure theory. This theory includes the Static Trade
off Theory and the Pecking Order Theory. The former holds that firms make funding choices as a
function of the firms overall weighted average cost of capital and seek primarily to minimize
this cost of capital. The latter suggests that managers are loath to issue new equity, derive funds
first from internal sources such as earnings, second from debt and finally from equity and equity
type issues. We find that high tech firms in the 1990s support, in some ways, the Static Trade Off
suggestion that firms with strong and riskier growth options hold more cash that other firms and
are more likely to draw initial funding from the equity markets. We find also that the market
conditions of the 1990s allowed newer, smaller and riskier firms greater access to equity
markets than ever before as a means of building large cash reserves. To account for this, we
propose an extension of existing Pecking Order Theory and introduce a Pecking Order Scale. By
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viewing the key factors that influence capital structure choice as a continuum or scale from all
equity on the left to all debt on the right, we are able to portray the capital structure choice of the
firm based on individual firm, industry and overall market factors. (Sheehan & Graham, 2001).
The researcher points out two common problems in capital structure research. First, although it is
not clear whether non financial liabilities should be considered debt, they should never be
considered as equity. Yet, the common financial debt to asset ratio measure of leverage commits
this mistake. Thus, research on increases in FD/AT explains, at least in part, decreases in
nonfinancial liabilities. Future research should avoid FD/AT altogether. The quantifies the
components of the balance sheet of large publicly traded corporations and discusses the role of
cash in measuring leverage ratios. Second, equity issuing activity should not be viewed as
equivalent to capital structure changes. Empirically, the correlation between the two is weak. The
capital structure and capital issuing literature are distinct. Leverage ratios are also the dependent
variable in the empirical capital structure literature. This literature tries to explain variations in
corporate leverage, both in the cross section of capital structure why some firms have high
leverage and in the time series (how capital structures evolve. (Welch, 2011).
Researchers examine that the impact of a stockholder bondholder conflict over the timing of the
exercise of an investment option on firm value and corporate financial policy. We find that an
equity maximizing firm exercises the option too early relative to a value maximizing strategy,
and we show how this problem can be characterized as one of overinvestment in risky
investment projects. Equity holders incentive to overinvest significantly decreases firm value
and optimal leverage, and significantly increases the credit spread of risky debt. Numerical
solutions illustrate how the agency cost of overinvestment and its effect on corporate financial
policy vary with firm and project characteristics. A fundamental difference between Lelands
model and our model is his assumption that firm asset value is exogenous and therefore
independent of financial structure. Implicitly, an increase in asset risk is accomplished by
replacing the firms current set of assets with new ones having exactly the same value but higher
risk. Accordingly, agency costs in his model only reflect the impact of an increase in risk on the
expected values of interest tax shields and bankruptcy costs. By contrast, our agency cost
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measure captures both the Leland effects and the potentially much larger loss of pure operating
firm value attributable to suboptimal investment decisions. (Mauer, 2004).
2.2.2 The Determinants of capital structure:
The researcher analyzes the explanatory power of some of the recent theories of optimal capital
structure. The study extends empirical work on capital structure theory in three ways. First, it
examines a much broader set of capital structure theories, many of which have not previously
been analyzed empirically. Second, since the theories have different empirical implications in
regard to different types of debt instruments, the authors analyze measures of short-term, long
term, and convertible debt rather than an aggregate measure of total debt. Third, the study uses a
factor-analytic technique that mitigates the measurement problems encountered when working
with proxy variables. In recent years, a number of theories have been proposed to explain the
variation in debt ratios across firms. The theories suggest that firms select capital structures
depending on attributes that determine the various costs and benefits associated with debt and
equity financing. Empirical work in this area has lagged behind the theoretical research, perhaps
because the relevant firm attributes are expressed in terms of fairly abstract concepts that are not
directly observable. (Wessels & Titman, 1988).
The researcher tries to determine a set of explanatory factors which affect the capital structure
choice of companies, using a cross sectional analysis. The investigation is based on the content
of two major competing theories in the capital structure literature, and compares the applicability
of these two theories in the selected data set. The data set covers two consecutive financial years
2007 and 2008 and comes from the financial statements of Tehran stock exchange listed
corporations. The capital structure proxies of this paper are the short term debt ratio and the long
term debt ratio. Explanatory variables are covering Liquidity, Effective tax rate, Payout ratio,
Non debt tax shield and uniqueness, which the last one was excluded because of data problems.
The results are based on a correlation test and a multiple regression of the developed hypotheses,
and show that Iranian capital structure decisions are more likely to the content of the pecking
order theory. Because 60% of the accepted items are consistent with the pecking order theory,
and the 40% reminders are consistent with the traditional static trade off theory. The only
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rejected hypothesis in both of short term and long term cases refers to non debt tax shield.
(Shahjahanpour, Ghalambor, & Aflatooni, 2010).
The researchers investigates how firms operating in capital market oriented economies the
United Kingdom and the United States and bank oriented economies France, Germany and Japan
determine their capital structure. Using panel data and a two step system GMM procedure, the
paper finds that the leverage ratio is positively affected by the tangibility of assets and the size of
the firm, but declines with an increase in firm profitability, growth opportunities and share price
performance in both types of economies. The leverage ratio is also affected by the market
conditions in which the firm operates. The degree and effectiveness of these determinants are
dependent on the countrys legal and financial traditions. The results also confirm that firms have
target leverage ratios, with French firms being the quickest in adjusting their capital structure
towards their target level, and the Japanese are the slowest. Overall, the capital structure of a firm
is heavily influenced by the economic environment and its institutions, corporate governance
practices, tax systems, the borrower lender relationship, exposure to capital markets, and the
level of investor protection in the country in which the firm operates. (Paudyal, Guney, &
Antoniou, 1995).
Researchers point of view that the structural equation modeling technique to empirically test the
determinants of capital structure choice for Dutch firms. We include major factors identified by
capital structure theories and construct proxies for these factors with consideration of specific
institutional settings in the Netherlands. We also carefully rescale the observed variables in order
to conform to the linear structure of the model and the multivariate normality assumption. Our
empirical results shed many important insights on Dutch firms financing behavior. In particular,
we identified important factors that have so far been ignored in the literature for the Dutch
capital structure choice. Furthermore our results provide evidence supporting the static trade off
hypothesis. While the pecking-order behavior is observed for Dutch firms, our results cast doubt
on the rationale of asymmetric information behind the pecking order hypothesis. We also point
out that the static cross section evidence is not sufficient to conclude whether nor not the
management of Dutch firms is entrenched. Models based on the dynamic behavior of firms
capital structure choice are called for such tests. (Jiang & Chen, 2011).
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The researcher analyze that the employs a new database, which contains the market and
accounting data from more than 1000 Chinese listed companies up to the year 2000, to document
the characteristics of these firms in terms of capital structure. As in other countries, leverage in
Chinese firms increases with firm size, non debt tax shields and fixed assets, and decreases with
profitability and correlates with industries. We also find that ownership structure affects leverage.
Different from those in other countries, leverage in Chinese firms increases with volatility and
firms tend to have much lower long term debt. The static tradeoff model rather than pecking
order hypothesis seems better in explaining the features of capital structure for Chinese listed
companies. The determinant of capital structure in Chinese listed companies and investigates
whether firms in the largest developing and transition economy of the world entertain any unique
features. Specifically we would like to answer the following two questions. The first is Are
corporate financial leverage decisions made in Chinese listed firms different from those made in
firms in economies where private property right is much more popular and market mechanism
have been the rule for years. The second is Do the factors that affect cross sectional variability of
capital structure in other countries have similar effects on Chinese firms capital structure. The
factors have been identified by theoretical studies and by previous empirical studies on data from
other countries including both developed and developing countries. (Song & Huang, 2000).
According to the researchers presents a continuous time model of a firm that can dynamically
adjust both its capital structure and its investment choices. In the model we indigenized the
investment choice as well as firm value, which are both determined by an exogenous price
process that describes the firms product market. Within the context of this model we explore
cross sectional as well as time series variation in debt ratios. We pay particular attention to
interactions between financial distress costs and debt holder/equity holder agency problems and
examine how the ability to dynamically adjust the debt ratio affects the deviation of actual debt
ratios from their targets. Regressions estimated on simulated data generated by our model are
roughly consistent with actual regressions estimated in the empirical literature. There is a
growing theoretical literature that considers transaction costs to explain the relatively slow
movement towards target debt ratios. These studies ignore debt holder/equity holder agency
problems that reduce incentives to move towards the target as well as financial distress costs that
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can increase incentives to move towards the target. These studies also ignore the possibility that
economic shocks that move firms away from their target debt ratios may also cause their target
debt ratios to change over time. If target debt ratios change over time, the estimates of the
adjustment speed could be biased, which may further complicate the analysis of how quickly
observed capital structures move towards their targets. (Tsyplakov & Titman, 2007).
2.2.3 Relationship between provision ratio, fixed assets, equity and dividend:
According to researchers in recent decades, developments in the financial sector have played a
major role in shaping macroeconomic outcomes in a wide range of countries. Financial
developments have reinforced the momentum of underlying economic cycles, and in some cases
have led to extreme swings in economic activity and a complete breakdown in the normal
linkages between savers and investors. These experiences have led to concerns that the financial
system is excessively procyclical, unnecessarily amplifying swings in the real economy. In turn,
these concerns have prompted calls for changes in prudential regulation, accounting standards,
risk measurement practices and the conduct of monetary policy in an attempt to enhance both
financial system and macroeconomic stability. Researchers examine these concerns and discuss
possible options for policy responses. It is not our intention to formally model the complex
interactions between the financial system, the macro economy and economic policy. Rather, we
have the more modest goal of stimulating discussion on some of the key linkages between
developments in the financial system and the business cycle. Our main focus is on the
intrinsically difficult issues of how risk moves over the course of a business cycle and on how
policymakers might respond to reduce the risk of financial instability, and attendant
macroeconomic costs, that can arise from the financial systems procyclicality. (Lowe, Furfine,
& Borio, 2001).
Researchers investigate the effects of focus versus diversification on bank performance using
data on Chinese banks during the 1996-2006 periods. We construct a new measure, economies of
diversification, and compare the results to those of the more conventional focus indices, which
are based on the sum of squares of shares in different products or regions. Diversification is
captured in four dimensions: loans, deposits, assets, and geography. We find that all four
dimensions of diversification are associated with reduced profits and higher costs. These results
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are robust regardless of alternative measures of diversification and performance. Furthermore,
we observe that banks with foreign ownership (both majority and minority ownership) and banks
with conglomerate affiliation are associated with fewer diseconomies of diversification,
suggesting that foreign ownership and conglomerate affiliation play an important mitigating role.
This analysis may provide important implications for bank managers and regulators in China as
well as in other emerging economies. (Zhou, Hasan, & Berger, 2004).
The researchers investigate the impact of bank privatization in transition countries, we take the
largest banks in six relatively advanced countries, namely, Bulgaria, the Czech Republic, Croatia,
Hungary, Poland and Romania. Income and balance sheet characteristics are compared across
four bank ownership types. Efficiency measures are computed from stochastic frontiers and used
in ownership and privatization regressions having dummy variables for bank type. Our empirical
results support the hypotheses that foreign owned banks are most efficient and government
owned banks are least efficient. In addition, the importance of attracting a strategic foreign
owner in the privatization process is confirmed. However, counter to the conjecture that foreign
banks cream skim, we find that domestic banks have a local advantage in pursuing fee for
service business. Finally, we show that both the method and the timing of privatization matter to
efficiency; specifically, voucher privatization does not lead to increased efficiency and early
privatized banks are more efficient than later privatized banks even though we find no evidence
of a selection effect. (Bonin, Hasan, & Wachtel, 2004).
The researcher studies the impact of mergers on corporate performance. It compares the pre and
post merger operating performance of the corporations involved in merger to identify their
financial characteristics. Also, the effect on merger-induced monopoly profits is identified by
looking at the persistence profile of the profits. Taking a sample of 36 cases of merger between
1992 and 1995, it is seen that there are no significant differences in the financial characteristics
of the two firms involved in merger. The mergers seem to lead to financial synergies and a
onetime growth. The analysis of the regression to norm shows that there is no increase in the post
merger profits. The competitive process is not impeded with merger even when no strong
antitrust laws are present. We change the focus from the effect of merger at the industry level to
the effect at the firm level. This study analyses the post-merger operating performance of the
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acquiring firm and attempts to identify the sources of merger-induced changes. The analysis of
regression to norm is done to identify whether competitive forces would have led to profit
changes even if the merger had not occurred. (Pawaskar, 2001).
The researchers analyze that a recent and expanding literature establishes the importance of
financial development for economic growth. Measures of the size of the banking sector and the
size and liquidity of the stock market are highly correlated with subsequent GDP per capita
growth. Moreover, emerging evidence suggests that both the level of banking sector development
and stock market development exert a causal impact on economic growth. Recent financial crises
in South East Asia and Latin America further underline the importance of a well functioning
financial sector for the whole economy. The introduces a new database that for the first time
allows financial analysts and researchers a comprehensive assessment of the development,
structure and performance of the financial sector. This database provides statistics on the size,
activity and efficiency of various financial intermediaries and markets across a broad spectrum of
countries and through time. The database will thus enable financial analysts and researchers to
compare the level of financial development and the structure of the financial sector of a specific
country with that of other countries in the region or countries with a similar GDP per capita
level. It allows comparisons of financial systems for a given year and over time. (Levine, Kunt,
& Beck, 1999).
The researcher says the determinants of excess dividend payments above mandatory
requirements in real estate investment trusts are evaluated. Payment of excess dividends is
related to factors associated with reduced agency costs, strong operating performance, the
implementation of a stock repurchase plan and an ability to access short term bank debt.
Recognizing that access to external capital is essential for long term growth. REITs manage
dividend policy to allow for capital acquisition in the form of both equity and debt. The
acquisition and use of short term bank debt provides REIT management flexibility in
determining dividend policy. The second component of the dividend payment is an additional or
excess payment over and above the minimal statutorily driven payment. It is this excess payment
that is of most interest as it is not driven by mandatory requirements, but is instead the
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component of the dividend payment that is directly attributable to management decisions and a
firms operating performance. (Hill & Hardin, 2008).
According to the researcher Grounded in agency theory, this study explores agency costs as a
determinant of dividend policy. Specifically, we examine how dividends are related to the
strength of shareholder rights. The evidence reveals an inverse association between dividend
payouts and shareholder rights, indicating that firms pay higher dividends where shareholder
rights are more suppressed. This evidence is consistent with the substitution hypothesis which
contends that firms with weak shareholder rights need to establish a reputation for not exploiting
shareholders. As a result, these firms pay dividends more generously than do firms with strong
shareholder rights. In other words, dividends substitute for shareholder rights. Finally, there is
evidence that regulation influences the association between dividends and shareholder rights. A
reputation for good treatment of shareholders is worth the most for firms with weak shareholder
rights. As a result, the need for dividends to establish a reputation is the greatest for such firms.
By contrast, for firms where shareholder rights are strong, the need for a reputation mechanism is
weaker, and, thus, so is the need to pay dividends. This view, therefore, posits that, all else equal,
dividends payout should be higher in firms with weaker shareholder rights. In other words, an
inverse relationship should be observed. (Jiraporn & Ning, 2006).
Researchers finds, as predicted, that upward revaluations of fixed assets by UK firms are
significantly positively related to changes in future performance, measured by operating income
and cash from operations, indicating revaluations reject asset value changes. Current year
revaluations revaluation balances also are significantly positively related to annual returns prices.
Relations between revaluations and future performance and prices are weaker for higher debt to
equity ratio firms, indicating motivation aspects how revaluations reject asset value changes. The
relations also are weaker for cross listed firms and in a more volatile economic time period. Our
inferences are robust to controlling for firms acquisition activity. Our motivation for the inquiry
stems from the current debate among managers, investors, accounting standard setters, and
capital market regulators about disclosure and recognition of long term non financial assets at
estimated value, rather than at depreciated historical cost. The estimates potential lack of
reliability derives from uncertainties inherent in the estimation and from elects of the
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management discretion such estimation uncertainties admit. Although managers can exercise
their discretion opportunistically, thereby reducing the estimates reliability, managers also can
use their discretion to reject their private information. If asset revaluations reject asset values and
are timely, we will and a positive association between revaluations and future changes in firm
performance. If revaluation amounts are unreliable, we will not and a significant association.
(Kasznik, Barth, & Aboody, 1999).
The researchers present the findings of a comparative study of dividend policies in Australia and
Japan. It examines panel data from the constituent stocks of the ASX 200 Index of the Australian
stock market and the Nikkei 225 Index of the Japanese stock market. The evidence that Australia,
with an imputation tax system which favors dividends over capital gains, has a significantly
higher dividend payout than Japan lends support to the influence of environment on dividend
policy. Dividend policies in Australia and Japan are affected by different financial factors. Fixed
effects regression models indicate that dividend policies are affected positively by size in
Australia and liquidity in Japan, and negatively by risk in Japan only. An industry effect is found
to be significant in both countries. These environmental factors cause differences in the level of
disclosure requirements of stock markets in response to various levels of political, financial, and
economic risk, which have implications for dividend policies. A firms dividend decision is
concerned with the deployment of the port that is generated from its operations. The port is either
retained by the firm for reinvestment or distributed to its shareholders as return on their equity
capital in the form of dividends. The extensive research on dividend policy in the last fifty years
has been unable to reach a consensus on a general dividend theory that can either explain the
process of dividend decision making, or predict an optimal dividend policy. The complex
scenario of making dividend decisions requires a holistic view of the many interrelationships of
dividend policy with other key decision variables in an overall corporate that aims to achieve the
firms objectives within the boundary of its environment. (HO, 2002).
2.2.4 Provision ratio effects capital structure:
According to the researchers Provisioning ratio measures the proportion of total nonperforming
loans against which a provision charge has been made against profit. Provisions were created to
protect the interests of one or both parties named in a contract or legal document. For example,
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the ant greenmail provision contained within some companies charters protects shareholders
from the board wanting to pass stock buybacks. Although stock buybacks can be a good thing for
shareholders, some buybacks allow board members to sell their stock to the company at inflated
premiums. The corporate debt values and capital structure in a unified analytical framework. It
drives closed from results for the value of long term risky debt and yield spreads, and for
optimal. When firm assets value follows a diffusion process with constant volatility. Debt values
and optimal lever age are explicitly linked to firm risk, taxes, bankruptcy costs, risk free interest
rates, payout rates, and bond covenants. The result elucidated the different behavior of junk
bonds versus investment grade bonds, and aspects of asset substitution, debt repurchase, and debt
renegotiation. (Lenland, 1994).
The researcher point of view chronic ulceration of the leg appears to have perplexed physicians
since medical records began. Although there are many reports on its management, little
information is available on the overall size and extent of the problem or its clinical course. Two
European surveys into venous disease have been made, providing data on the prevalence of leg
ulceration. The first was a study, based on a questionnaire, of the adult population of Klatov in
Bohemia in 1961 by Bobbed teal. Those people who indicated that they had evidence of venous
disease were subsequently examined. This survey showed that the prevalence of leg ulceration,
either open or healed, was 1'. The second and more recent study, of factory workers in Basle,
Switzerland, showed a similar proportion.2 Information concerning the United Kingdom is
almost nonexistent. In 1929 Dickson Wright suggested a prevalence of 0.5% but admitted that
this figure was an estimate. In 1951 Boyd et al arrived at a similar figure based on the returns of
patients registered as off work due to leg ulceration, 4 but this figure was probably an
underestimate. (Dale & C v Ruckely, 1985).
According to the researcher the article analyzes effect of a firm capital structure on its product
market strategy the context of a model of repeated oligopoly. I show that there exists an upper
bond on the firm debt level in the absence of bankruptcy costs. This bound depends on the
number of firm in the industry, the discount rate, the elasticity of demand and other related
factors that effect product market equilibrium in oligopolies. I also show that warrants may
decrease equilibrium output in oligopolies and that convertible debt and warrants may be used to
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raise the upper bound on the debt level in specific cases. I know that the effect of capacity
constraints on optimal capital structure is no monotonic. (Maksimovic, 1988).
The researchers examine how chief executive officer compensation is related to firms capital
structures. My tests address the simultaneity of these decisions and distinguish between debt
types with different theoretical implications for managerial incentives. Pay performance
sensitivity decreases in straight debt leverage, but is higher in firms with convertible debt.
Furthermore, stock option policy is the component of chief executive officer pay that is most
sensitive to differences in capital structure. The results strongly support the hypothesis that firms
trade off shareholder manager incentive alignment in order to mitigate shareholder-bondholder
conflicts of interest. The hypothesis that debt reduces manager shareholder conflicts can explain
some but not all of the results. Modern agency theory suggests that a firms financial structure
can affect the agency relationship between shareholders and managers, and also that conflicts of
interest between shareholders and bondholders can affect the provision of optimal incentives to
managers. However, assuming that capital structure is unimportant to understand how firms set
their compensation packages, studies of executive compensation typically ignore the role of
firms capital structures. This shows that capital structure matters in setting executive pay, and
sheds light on the nature of this relation. (Molina, 2003).
2.2.5 Fixed assets effects on capital structure:
The researchers study the effect of asset tangibility on capital structure by exploiting variation in
the salability of corporate assets. We do so using an instrumental variables approach that
incorporates measures of supply and demand for different types of tangible assets machines, land
and buildings. Theory suggests that tangibility matters because it allows creditors to more easily
repossess a bankrupt firms assets. However, tangible assets are often illiquid and hard to
redeploy. Our study shows new evidence that the redeploy ability of tangible assets is a key
determinant of firm capital structure beyond standard measures of tangibility. Consistent with a
credit supply side view of capital structure, we find that asset redeploy ability is a particularly
important driver of leverage for firms that are more likely to face credit frictions small, unrated,
and low payout firms. Additional tests show that asset redeploy ability facilitates borrowing the
most during periods of tight credit in the economy. Our findings are consistent with capital
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structure models of contract incompleteness and limited enforceability. (Campello & Giambona,
2010).
The researcher analyze that as part of the comprehensive revision of the national income and
product accounts, the Bureau of Economic Analysis has released new estimates of fixed assets
and consumer durable goods formerly fixed reproducible tangible wealth for 1998 and revised
estimates for 192597. These estimates cover the net stock of equipment and software and of
structures owned by business and government and the net stock of durable goods owned by
consumers. In addition, as part of the changes to the presentation of the NIPA tables, BEA is
introducing a new table that shows the changes in the net stock of produced assets (fixed assets
and change in private inventories). This table improves the consistency of the NIPAs with
international guidelines and is part of BEAs long term effort to integrate the estimates of stocks
and flows. (Herman, 1998).
Researchers find, as predicted, that upward revaluations of fixed assets by United Kingdom firms
are significantly positively related to changes in future performance, measured by operating
income and cash from operations, indicating revaluations reject asset value changes. Current year
revaluations revaluation balances also are significantly positively related to annual returns prices.
Relations between revaluations and future performance and prices are weaker for higher debt-to
equity ratio firms, indicating motivation aspects how revaluations reject asset value changes. The
relations also are weaker for cross-listed firms and in a more volatile economic time period. Our
inferences are robust to controlling for firms acquisition activity. We focus on United Kingdom
firms because United Kingdom generally accepted accounting principles permit fixed assets to
be recognized in financial statements at revalued amounts. Many publicly traded United
Kingdom firms revalue assets, resulting in a large sample of firms for our tests. Under united
kingdom GAAP, managers can increase or decrease the carrying value of assets when asset
values change. Thus, United Kingdom asset revaluations provide an opportunity to test whether
firms estimates of fixed asset fair values reject managers expectations about future firm
performance. We focus on upward revaluations because upward revaluations are discretionary
and not permitted under united states GAAP, whereas, as under united states GAAP, downward
revaluations are required when asset values fall. (Kasznik, Barth, & Aboody, Revalu, 1999).
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The researchers tests alternative theories about the effect of asset liquidity on capital structure.
Using data from a broad sample of U.S. public companies, I find that leverage is positively
related to asset liquidity. Further analysis reveals that the relation between asset liquidity and
secured debt is positive, whereas the relation between asset liquidity and unsecured debt is
curvilinear. The results are consistent with the view that the costs of financial distress and
inefficient liquidation are economically important and that they affect capital structure decisions.
In addition, the results are consistent with the hypothesis that the costs of managerial discretion
increase with asset liquidity. The impact of the liquidity of a firms assets on optimal leverage
has been a source of debate for many years. The rationale for a positive effect of asset liquidity
on leverage relies on the idea that less liquid assets sell at higher costs, which increases the costs
of liquidation, bankruptcy, and debt. Lower asset liquidity therefore creates the need to reduce
the probability of costly default by lowering the leverage. (Sibilkov, 2007).
2.2.6 Equity effects on capital structure:
According to researcher the financing decisions of firms in response to changes in investments
and profits. We find that information and agency costs play important roles in firms financing
decisions. However, we find no strong evidence that asymmetric information about the value of a
firms assets causes equity to be used only as a last resort. Indeed equity is the predominant
source of finance in situations, such as profit shortfalls, investment in intangible assets, and
internally generated growth opportunities, where informational asymmetries and agency costs
are likely to be high. We also find that firms respond asymmetrically to positive and negative
profit shocks. In financing fixed assets, high asymmetric information firms use more short term
debt and less long term debt, whereas firms with high potential agency problems use
significantly more equity and less long term debt and cash. We test these predictions empirically
by examining how firms finance their investments and profit shortfalls. Specifically, we estimate
a multi-equation system whose dependent variables are financing sources, whose independent
variables are factors affecting the need for finance, and whose coefficients are constrained to
conform to accounting identities. (Gatchev & Spindt, 2008)
.
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The researchers find do multiple security markets, representing different claims on the same
underlying asset, impact equity market quality. Although this question is not new, it has emerged
as a central issue of debate among policymakers, academics, and financial market participants.
The growth of derivatives markets, hedge funds and multi security trading strategies has brought
increasing attention to important questions regarding their impact on liquidity and market
exigency. On one hand, derivatives are valuable hedging tools. They can also provide informed
traders with incentives to trade, facilitating price discovery. However, there may be costs as well.
For example, prices may become less informative if the new market expands informed traders'
strategy sets, making it more difficult for market makers to learn from their trades as in Bias and
Hellions, 1994. Equity markets may also become less liquid if the ability to hedge a position in a
related market increases the willingness of risk-averse informed traders to trade, driving out
uninformed liquidity traders as in Dow, 1998. Given the theoretical ambiguity of the impact of
derivatives markets on equity market quality, the dominant effect is an empirical question.
(Boehmer, Chava, & Tookes, 2010).
The researcher says the long term perspective underscores the remarkable wealth building
potential of the equity premium. It should come as no surprise that the equity premium is of
central importance in portfolio allocation decisions and estimates of the cost of capital. And is
center in the current debate about the advantages of investing Social Security funds in the stock
market. In putting together an investment portfolio investors choose among different assets such
as stock, real estate or corporate bonds. Typically an investor chooses the portfolio that is right
for him by assessing the relative risk characteristics and expected return of various alternatives.
The risk premium spells out the differential return that an investor can expect different assets to
yield. (Mehra, 2001).
2.2.7 Dividend effects on capital structure:
The researchers assume that outside investors have imperfect information about firms'
profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that
under these conditions, such dividends function as a signal of expected cash flows. By
structuring the model so that finite lived investors turn over continuing projects to succeeding
generations of investors, we derive a comparative static result that relates the equilibrium level of
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dividend payout to the length of investors' planning horizons. A model in which cash dividends
function as a signal of expected cash flows of firms in an imperfect-information setting. We
assume that the productive assets in which agents invest stay in place longer than the agents live
and that ownership of the assets is transferred, over time, to other agents. The latter are a priori
imperfectly informed about the profitability of assets held by different firms. The major signaling
costs that lead dividends to function as signals arise because dividends are taxed at the ordinary
income tax rate, whereas capital gains are taxed at a lower rate. (Bhattacharya, 1979).
The researchers extend the standard finance model of the firm's dividend investment financing
decisions by allowing the firm's managers to know more than outside investors about the true
state of the firm's current earnings. The extension endogamies the dividend and financing
announcement effects amply documented in recent research. But once trading of shares is
admitted to the model along with asymmetric information, the familiar Fisherman criterion for
optimal investment becomes time inconsistent. The market's belief that the firm is following the
Fisher rule creates incentives to violate the rule. We show that an informational consistent
signaling equilibrium exists under asymmetric information and the trading of shares that restores
the time consistency of investment policy, but leads in general to lower levels of investment than
the optimum achievable under full information and/or no trading. Contractual provisions that
change the information asymmetry or the possibility of profiting from it could eliminate both the
time inconsistency and the inefficiency in investment policies, but these contractual provisions
too are likely to involve dead weight costs. Establishing which route or combination of routes
serves in practice to maintain consistency remains for future research. (Rock & Miller, 1985).
According to the researchers assuming that managers possess inside information about their
firms' future prospects, they may use various signaling devices to convey this information to the
public. Two of the most important signaling devices available are earnings and dividend figures.
The "information content of dividends" hypothesis asserts that managers use cash dividend
announcements to signal changes in their expectations about future prospects of the firm.' Since
dividend decisions are almost solely at management's discretion. The second announcements of
dividend changes should provide less ambiguous information signals than earnings numbers. Fur
the more, given the discrete nature of dividend adjustments, signals transmitted by these changes
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may even provide information beyond that conveyed by the corresponding earnings numbers. If
dividends, then, do convey useful information, in an efficient capital market this will be reflected
in stock price changes immediately following a public announcement. It is, therefore, an
empirical question whether dividend information content is useful to capital market participants.
A major difficulty in assessing dividend information content lies in the fact that dividend and
earnings announcements often are closely synchronized. Thus, one has first to adequately
identify information reflected in both earnings and dividends and then consider the remainder of
the information conveyed by dividend announcements. (swary & aharnoy, 1980).
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CHAPTER NUMBER 3:
DATA & METHODOLOGY
3.1 Research Paradigm:
Research paradigm is basically what the religion of research so my research paradigm is
positivism. Positivism is a true knowledge which is based on experience of sense and can be
obtained by observation and experiment. Basically it is the scientific and natural science. In other
words it is a scientific knowledge. In research positivism these are the some important points
which I relate our research. The ontology of my research is singular reality existing apart from
research perception and cultural basis. The epistemology of my research is distance &
impartiality. The axiology of my research is unbiased. The rhetoric of my research is formal
style. The methodology of my research is deductive. The strategy of inquiry is experiments and
field work. The method of my research is predetermined approach numerical data. (Mohd Noor,
2008).
3.2 Research Approach:

According to my research studies the research approach is quantitative research. The quantitative
research approach is a formal, objective and systematic process in which numerical data is
utilized to obtain information about the world. The main objectives of the quantitative approach
are to generalize, objective and test theories and hypothesis. The collection of data on
predetermined instruments that yield statistical data. The strategies of quantitative approach are
experimental and surveys. Quantitative data is any data that is in numerical form such as
statistics, percentages, etc. (Sukamolson, 2008).
3.3 Population and Sampling

According to my research studies there is not population because I dont conduct the survey for
collecting the data. I collected the data through annual reports of selected any one sector. So I
select the banking sector and collect the data to annual reports of banks. The purpose of
collecting of data through annual reports is that my topic and variables are these types which
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never collect the data through survey & interview. So I adopt this method and collect the data
through annual reports.
3.4 Data & Instrumentation:

In data and instrumentation I adopt the secondary method in which i collect the data through
annual reports of any selected sector. I select the banking sector and collect the data through
banks annual reports. The banks which we selected are Alfallah Banks, Muslim commercial
Banks, United Bank limited, Silk Bank and Askari Bank limited. These are the commercial
banks. In these banks which we collect the data for last five years.
3.5 Data Analysis:

After the data collected we converted the data in SPSS software and this is used to analyze the
data because SPSS is statistical software and numeric data is analyzed statistically and it will
help us to interpreter the finding. In SPSS software we used two type of test and these tests are:
3.5.1 Frequency table:
Making a frequency table through the frequency distribution which is the tally or count of the
number of times each score category on a single variable is marked by respondents. A frequency
can be further summarized by expressing them as percentage of the total using a formula and the
formula is that percentage is equal to frequency divided total multiply by 100. It is a test in
which valid, missing and total are given in this table. (Nrousis, 2008).
3.5.2 Bar chart:
Bar graph ate usually to display categorical qualitative data. The bar in bar graphs is usually
separated and the height of the bars shows the frequency of that category. In bar chart there are
different bars according to the bar graph can show the number of cases in particular Categories,
or it can show the score on some continuous variable for different categories. (pallant, 2005).
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3.5.3 Five figure summary:
The five figure summaries are the five figures. The first figure is that minimum value the
smallest value. The second is maximum value it is the largest value. The third is median the
medians divide the data into two halves, each with same number of observations. The fourth
figure is lower quartile that is the middle value of first half the last figure is the middle value of
second half. (Green, Salkind, & Jones, 1996).
3.5.4 Histogram:
Histograms are used to display the distribution of a single continuous variable for example age,
perceived stress scores. In simple words histogram is a form of a bar graph used with numerical
(scale) variable preferably of continuous nature. Unlike the bar graph in a histogram there is no
space between the bars. The data is continuous so the lower limit of any one interval is also the
upper limit of the previous interval. It is useful to summarize the data examining and comparing
frequency distributions, check normality of data. (Julie, 2008).
3.5.5 Scatter plot:
Scatter plot is a plot or graph of two variables that show how the score on one variable associates
with his or her score on the other variables. Each dot or circle on the plot represents a particular
individual score on the two variables being represented on the two variables. The measurement
for both variables is continuous measurement data. (F. J. & L. B., 2005).
3.5.6 Pearson correlation:
The Pearson correlation is scale vs scale. The Pearson correlation is used when you have two
variables that are normal scale. An assumption of the Pearson correlation is that the variables are
related in a linear straight line way so we will examine the scatter plots to see if that assumption
is reasonable. The Pearson correlation and the spearmen correlation will be computed and the
spearman is used when one or both is ordinal. (Bolboaca, 2006).
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3.5.7 Spearmen correlation:
The spearmen correlation is that when the Pearson assumption is not fulfilled so we apply the
spearmen tests. The spearmen correlation with the assumption that the relationship between two
variables is monotonically non linear. (jantschi, 2006).
3.5.8 Single regression:
In statistics, simple linear regression is the least squares estimator of a linear regression model
with a single explanatory variable. In other words, simple linear regression fits a straight line
through the set of points in such a way that makes the sum of squared residuals of the model that
is, vertical distances between the points of the data set and the fitted line as small as possible.
Basically the simple regression is used to check the contribution of independent variables in the
dependent variable if the dependent variable is one. (Khelifa, 2002).
3.5.9 Multiple regressions:
Multicollinearity is a statistical event in which two or more predictor variables in a multiple
regression model are highly correlated, meaning that one can be linearly predicted from the
others with a non trivial degree of accuracy. In this situation the coefficient estimates may
change erratically in response to small changes in the model or the data. That is, a multiple
regression model with correlated predictors can indicate how well the entire bundle of predictors
predicts the outcome variable, but it may not give valid results about any individual predictor, or
about which predictors are redundant with respect to others. In simple words multiple regressions
is used to check the contribution of independent variables in the dependent variables if the
dependent variables are more than one. (Rubinfeld, 2008).
3.6 Limitations and Delimitations:

In limitations and delimitations these points are important for my research studies:
The data is not collected through survey.

The data is collected from only annual reports.
We take only limited variable.
The all test is applying only Eviews software.
Regarding my research only one sector is selected.
We will narrow down my research only the population of Pakistan.
Take the data only last five years.
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3.7 Ethical Consideration:

Following issues will be considered in connection with ethics.
All information provided would be held in strict confidence.
The data will be collected through annual reports of banks that must be truly.
Data will not use for the unethical purpose.

After the research result will be display.
Once the study has been completed by fulfilling the obligations that were a
requirement of doing the research, the results would be shared with the participants
and a report be submitted to the organization that will allow access to the
researcher.
The data will be collected are based on facts and figures.
The data is only used for the purpose of research.
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CHAPTER NUMBER 4:
RESULT AND ANALYSIS
4.1 Mean Median and Mode:
Mean
Median
Maximum
Minimum
Std. Dev.
D?
442906.0
300943.0
1864510.
24217.00
443051.4
E?
49177.28
19770.00
192950.0
1763.000
55023.90
FA?
14091288
13773293
28158918
2443805.
7495975.
PR?
2436042.
1864510.
9644927.
30444.00
2414468.
Interpretation:
This is the first test in which tell about the mean, median, maximum, minimum and standard
deviation. So, there are the four variables and these variables are independent variables the first
variable is dividend, the second variable is equity and third variable is fixed assets and the last
variable is provision ratio. Before we apply these tests I take the data to annual reports of banks
and put the data in excel sheet then I apply the tests. The mean of the dividend is 442906.0. The
mean is equity is 49177.28. The mean is fixed assets is 14091288. The mean is provision ratio is
2436042. The median of the dividend is 300943.0. The median of equity is 19770.00. The
median of fixed assets is 13773293. The median of provision is 1864510. The maximum value of
dividend is 1864510. The maximum value of equity is 192950.0. The maximum value of fixed is
28158918. The maximum value of provision ratio is 9644927. The minimum value of dividend is
24217.00. The minimum value of equity is 1763.000. The minimum value of fixed assets is
2443805. The minimum value of provision ratio is 30444.00. The standard deviation of dividend
is 44305.14. The standard deviation of equity is 55023.90. The standard deviation of fixed assets
is 7495975. The standard deviation of provision is 2414468.
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4.2 Pool unit Root test (Dividend variable):
Pool unit root test: Summary
Date: 05/06/13 Time: 00:34
Sample: 2008 2012
Series: D_C1, D_C2, D_C3, D_C4, D_C5
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic selection of lags based on SIC: 0
Newey-West bandwidth selection using Bartlett kernel
Balanced observations for each test
Crosssections
Obs
5
5
20
15
Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat
2.73357
0.9969
ADF - Fisher Chi-square
3.37322
0.9712
PP - Fisher Chi-square
3.26296
0.9745
5
5
5
20
20
20
Null: No unit root (assumes common unit root process)

Hadri Z-stat
3.90377
0.0000
25
Method
Statistic
Prob.**
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t*
2.26673
0.9883
Breitung t-stat
-0.64413
0.2597
** Probabilities for Fisher tests are computed using an asymptotic Chi

-square distribution. All other tests assume asymptotic normality.
Interpretation:
It is the pool unit root test. The stationary of Dividend has been checked through the test for the
data of 5 companies for the last 5 years. The method used in this test is unit root it means
assumes common unit root process. I apply six tests the first test is Levin, Lin & Chut which is
the prob value is 0.9883 this value greater than 0.05 the data is not stationary. The second test is
Bretung T Stat which is the Prob value is 0.2597 this value is greater than 0.05 the data is not
stationary. The third test is Im Pesaran and Shin W Stat which is the prob value is 0.9969 this
value is greater then 0.05 the data is not stationary. The fourth test is ADF Fisher Chi Square
which is the Prob value is 0.9712 that is greater than 0.05 the data is not stationary. The fifth test
is PP Fisher Chi square which is the prob value is 0.9745 that is greater than 0.05 the data is not
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stationary. The last test is Hadri Z stat which the prob value is 0.0000 less than 0.05 so the data is
stationary. In finally most of the tests are not good because the data is not stationary.
Pool unit root test (Equity):

Date: 05/06/13 Time: 00:34
Sample: 2008 2012
Series: E_C1, E_C2, E_C3, E_C4, E_C5
Crosssections
Obs
5
5
20
15

-3.98321
0.0000
21.1315
0.0202
25.7065
0.0042
5
5
5
20
20
20

Hadri Z-stat
4.86336
0.0000
25
Method
Statistic
Prob.**
Levin, Lin & Chu t*
-12.5712
0.0000
Breitung t-stat
-1.33778
0.0905
** Probabilities for Fisher tests are computed using an asympotic Chi

Interpretation:
It is the pool unit root test. The stationary of Equity has been checked through the test for the
data of 5 companies for the last 5 years. The method used in this test is unit root it means
the prob value is 0.0000 this value less than 0.05 the data is stationary. The second test is Bretung
T Stat which is the Prob value is 0.0905 this value is greater than 0.05 the data is not stationary.
The third test is Im Pesaran and Shin W Stat which is the prob value is 0.0000 this value is less
than 0.05 the data is stationary. The fourth test is ADF Fisher Chi Square which is the Prob value
is 0.0202 that is greater than 0.05 the data is not stationary. The fifth test is PP Fisher Chi square
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which is the prob value is 0.0042 that is less than 0.05 the data is stationary. The last test is Hadri
Z stat which the prob value is 0.0000 less than 0.05 so the data is stationary. In finally most of
the tests are good and the most data is stationary.
4.3 Pool unit root test (Fixed assets):

Date: 05/06/13 Time: 00:34
Sample: 2008 2012
Series: FA_C1, FA_C2, FA_C3, FA_C4, FA_C5
CrossMethod
Statistic
Prob.**
sections
Obs

Levin, Lin & Chu t*
-1.57733
0.0574
20
Breitung t-stat
-0.38787
0.3491
15
-0.18908
0.4250
20
8.23438
0.6060
20
8.08784
0.6203
20
25


Hadri Z-stat
3.75360
0.0001
** Probabilities for Fisher tests are computed using an asymptotic Chi

Interpretation:
It is the pool unit root test. The stationary of fixed assets has been checked through the test for
the data of 5 companies for the last 5 years. I apply six tests the first test is Levin, Lin & Chut
which is the prob value is 0.0574 this value is greater than 0.05 the data is not stationary. The
second test is Bretung T Stat which is the Prob value is 0.3491 this value is greater than 0.05 the
data is not stationary. The third test is Im Pesaran and Shin W Stat which is the prob value is
0.4250 this value is greater than 0.05 the data is not stationary. The fourth test is ADF Fisher Chi
Square which is the Prob value is 0.6060 that is greater than 0.05 the data is not stationary. The
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fifth test is PP Fisher Chi square which is the prob value is 0.6203 that is greater than 0.05 the
data is not stationary. The last test is Hadri Z stat which the prob value is 0.0001 less than 0.05 so
the data is stationary. In finally most of the tests are not good only Hadri Z stat is show the data
is stationary.
4.4 Pool unit root test:

Date: 05/06/13 Time: 00:35
Sample: 2008 2012
Series: PR_C1, PR_C2, PR_C3, PR_C4, PR_C5
Crosssections
Obs
5
5
20
15

-0.17472
0.4307
7.89264
0.6393
11.4691
0.3222
5
5
5
20
20
20

Hadri Z-stat
2.54051
0.0055
25
Method
Statistic
Prob.**
Levin, Lin & Chu t*
-2.68813
0.0036
Breitung t-stat
-0.57649
0.2821
** Probabilities for Fisher tests are computed using an asympotic Chi

Interpretation:
It is the pool unit root test. The stationary of provision ratio has been checked through the test for
the data of 5 companies for the last 5 years. The method used in this test is unit root it means
the prob value is 0.0036 this value is less than 0.05 the data is stationary. The second test is
Bretung T Stat which is the Prob value is 0.2821 this value is greater than 0.05 the data is not
stationary. The third test is Im Pesaran and Shin W Stat which is the prob value is 0.4307 this
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value is greater than 0.05 the data is not stationary. The fourth test is ADF Fisher Chi Square
which is the Prob value is 0.6393 that is greater than 0.05 the data is not stationary. The fifth test
is PP Fisher Chi square which is the prob value is 0.3222 that is greater than 0.05 the data is not
stationary. The last test is Hadri Z stat which the prob value is 0.0055 greater than 0.05 so the
data is not stationary. In finally most of the tests are not good in provision ration tests because
the data is not stationary.
4.5 Regression Test:

Dependent Variable: D?
Method: Pooled Least Squares
Date: 05/06/13 Time: 00:35
Sample: 2008 2012
Included observations: 5
Cross-sections included: 5
Total pool (balanced) observations: 25
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
E?
326141.4
2.374360
117069.1
1.604299
2.785889
1.479999
0.0105
0.1524
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.086954
0.047256
432456.3
4.30E+12
-358.8621
1.799359
Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
442906.0
443051.4
28.86897
28.96648
2.190396
0.152442
Interpretation:
This the regressions test. The method is pooled least squares. In which included observation is
five and the cross sections included is five. The total pool balanced observations is 25. The
independent variable equity which is the prob value is 0.1524 that is the greater than 0.05 it mean
the data is not stable. The adjusted r square is round about 47% this percentage of change in
dependent and independent variable. In Durbin Watson value which is less than 2.
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Date: 05/06/13 Time: 00:35
Sample: 2008 2012
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
E?
FA?
27236.76
-0.435050
0.031017
178855.5
2.002794
0.014701
0.152284
-0.217221
2.109768
0.8804
0.8300
0.0465
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.240599
0.171562
403259.0
3.58E+12
-356.5589
2.208054
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
442906.0
443051.4
28.76471
28.91098
3.485092
0.048438
Interpretation:
independent variables are equity and fixed assets. The prob value of equity is 0.8300 that is the
greater than 0.05 it mean the data is not stable. The prob value of fixed assets is 0.0465 that is
greater than 0.05 the data is not stable. The adjusted r square is round about 24% this percentage
of change in dependent and independent variable. In Durbin Watson value which is greater than
2.
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4.6 Regression test:
Date: 05/06/13 Time: 00:35
Sample: 2008 2012
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
E?
FA?
PR?
47855.01
-1.213358
0.040169
-0.045693
177945.1
2.086936
0.016440
0.038137
0.268931
-0.581406
2.443298
-1.198128
0.7906
0.5672
0.0235
0.2442
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.289188
0.187643
399325.9
3.35E+12
-355.7324
2.355280
Mean dependent var

S.D. dependent var
Schwarz criterion
F-statistic
Prob(F-statistic)
442906.0
443051.4
28.77859
28.97361
2.847892
0.062069
Interpretation:
independent variables are equity, fixed assets and provision ratio. The prob value of equity is
0.5672 that is the greater than 0.05 it mean the data is not stable. The prob value of fixed assets is
0.0235 that is greater than 0.05 the data is not stable. The prob value of provision ratio is
0.038137 that is greater than 0.05 the data is not stable. The adjusted r square is round about
28% this percentage of change in dependent and independent variable. In Durbin Watson value
which is greater than 2.
CHAPTER NO 5:
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DISCUSSION AND CONCLUSION
5.1 Discussion:
The primary purpose of my research study is to find out those factors that effect on capital
formation. My research study is related to finance. The sector my research study is Banking and
Business sector. This topic is beneficial for all multinational and national companies which
operate in Pakistan. For this research study I used the quantitative data. I used the secondary
instrument. The data is collected for annual reports of banks. I chose the banking sector because
the banking sector is more related to my research study. I take five banks these are united Bank
Limited, Alfallah Bank Limited, Silk Bank Limited, MCB Bank and Askari Bank Limited. The
data which I take the period of 5 years 2008-2012 these reports are annually. The variables which
I take and these are directly effect on capital formation. These are Provision ratio, fixed assets,
dividend and equity. In literature review I observe that these variables are impact on capital
structure.
For the point of view finance capital structure refers to the way a corporation finances its assets
through some combination of equity, debt, or hybrid securities. A firm's capital structure is then
the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity
and $80 billion in debt is said to be 20% equity-financed and 80% debt financed. The firm's ratio
of debt to total financing, 80% in this example is referred to as the firm's leverage. In reality,
capital structure may be highly complex and include dozens of sources. Gearing Ratio is the
proportion of the capital employed of the firm which come from outside of the business finance,
e.g. by taking a short term loan etc. basically the capital structure is help to information about the
balance sheets its ups and downs.
According to the researcher (Puwanenthiren Pratheepkanth relationship between capital structure
with financial performance because its linked with finance). Capital structure is most significant
discipline of companys operations. This researcher constitutes an attempt to identify the impact
between Capital Structure and Companies Performance, taking into consideration the level of
Companies Financial Performance. The relationship between capital structure and financial
performance is one that received considerable attention in the finance literature. How important
is the concentration of control for the company performance or the type of investors exerting that
control are questions that authors have tried to answer for long time prior studies show that
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capital structure has relating with corporate governance, which is the key issues of state owned
enterprise. To study the effects of capital structure or financial performance, will help us to know
the potential problems in performance and capital structure.
Provision ratio is effect on capital structure because its protect for provision. The Provisioning
Ratio measures the proportion of total non-performing loans against which a provision charge
has been made against profit. Another name of the provision ratio is coverage ratio. Its totally
linked with bank. Its the complete name of provision coverage ratio. Loans and advances given
by the banks to its customers are an Asset to the bank. Just for the sake of simplicity, we can
understand that a loan (an asset for the bank) turns as NPA when the EMI, principal or interest
component for the loan is not paid within 90 days from the due date. Thus a Bad Loan is an asset
that ceases to generate any income for the bank.
A fixed asset is also effect on capital structure. Its very important part which is directly effect on
capital structure. Fixed assets, also known as a non-current asset or as property, plant, and
equipment. According to International Accounting Standard (IAS) 16, Fixed Assets are assets
whose future economic benefit is probable to flow into the entity, whose cost can be measured
reliably. Tracking assets is an important concern of every company, regardless of size. Fixed
assets are defined as any 'permanent' object that a business uses internally including but not
limited to computers, tools, software, or office equipment. While employees may use a specific
tool or tools, the asset ultimately belongs to the company and must be returned. And therefore
without an accurate method of keeping track of these assets it would be very easy for a company
to lose control of them. In many researchers are prove that fixed assets are the responsibility of
any company. Its a big effect on capital structure.
Equity is also effect on capital structure equity is the residual claim or interest of the most junior
class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity
exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders'
funds, shareholders' capital or similar terms) represents the remaining interest in assets of a
company, spread among individual shareholders of common or preferred stock. According to the
researcher (Vladimir A. Gatchev).At the start of a business, owners put some funding into the
business to finance operations. This creates a liability on the business in the shape of capital as
the business is a separate entity from its owners. Businesses can be considered, for accounting
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purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been
accounted for, the positive remainder is deemed the owner's interest in the business.
Dividend is also effect on capital structure according to the researcher ( Merton H. Miller) Dividend
is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in
proportion to their shareholding. For the joint stock company, paying dividends is not an expense
rather, it is the division of after tax profits among shareholders. Dividends are usually paid in the
form of cash, store credits (common among retail consumers' cooperatives) and shares in the
company (either newly created shares or existing shares bought in the market.). Its a easy way
that profit is divided between investors. On the variable point of view there are many researchers
work on this variable.
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5.2 Conclusion:
After the completing research of my studies. I do the conclusion which is based on results. I
collect the data from annual reports of Banks because my sector is banking and I take the data of
five banks (Alfallah Bank, Askari Bank, United Bank Limited, MCB Bank and Silk Bank
Limited). These are the five banks which I take the data. Before I do the analyze the data and test
apply I put the data on excel sheet. In excel I make a sheet take four independent variables
(provision ratio, fixed assets, equity and dividend) and put these values in excel sheet. I take the
five years data 2008-2012
The software which I apply the test in E-views Software. In this software the first test is to check
the mean, median, mode and standard division there is no missing the data. I take four variables
and this test is applied. In second test is Pool rote unit test it is a test in which test I apply six
more tests these are (Levin, Lin & Chu t, Breitung t-stat, Im, Pesaran and Shin W-stat, ADF
Fisher, Chi square, PP - Fisher Chi-square, Hadri Z-stat) in which to check the data is stationary.
Similarly these are more applied four tests of pool root unit. The last test is regression test which
is to check the percentage of dependent variable is changed to independent variable.
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5.3 Recommendation:
We improve the capital structure through three fundamental aspects of capital efficiency
these are capex efficiency, working capital efficiency and disposal of noncore assets and
activities.
An appropriate capital structure is a critical decision for any business organization so we

take the right decision.
To understand the policies of capital structure so the business or any firm towards the
growth.
The companies take steps to improve the provision ratio because Provisioning Ratio
measures the proportion of total non-performing loans against which a provision charge
has been made against profit.
Fixed assets are the capital for any company so the any organization can save us because
in future time period we will convert in cash.
The organization protects fixed assets because these are items of value which the
organization has bought and will use for an extended period of time.
The auditors do audit for the organizations in every six month to check and balance the
fixed assets which is used in organization.
Every owner of the organization do must invest in the fixed assets.
Equity is the ownership so its the best suggestion is that every person purchase the share
or partnership in business because the ownership is divided and profit or loss is beneficial
for both persons they can bear the loan and profit.
Purchase the shares in stock market and make a shareholder (owner) of any company it is
the best way to make the owner of the company.
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Every person makes a shareholder of any organization and they met the dividend because
it is the investing is a long term process.
The director of the company gives the amount of dividend to stockholders on time in cash
because its a good impression on organization and its directors.
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APPENDIXES
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Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

1.3 Objective of the Study:

To examine the impact of provision ration on capital structure.

1.4 Significance of the study:

The study will be help in literature contribute.

Attributes that effect on capital structure

1.5 Research Question:

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

2.1 Literature Review Flow Model:

Provision ratio, fixed

assets, equity, and

dividend and capital

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

Attributes that effect on capital structure

3.2 Research Approach:

3.3 Population and Sampling

Attributes that effect on capital structure

3.4 Data & Instrumentation:

3.5 Data Analysis:

Attributes that effect on capital structure

Attributes that effect on capital structure

3.6 Limitations and Delimitations:

The data is not collected through survey.

Attributes that effect on capital structure

3.7 Ethical Consideration:

All information provided would be held in strict confidence.

Data will not use for the unethical purpose.

The data will be collected are based on facts and figures.

The data is only used for the purpose of research.

Attributes that effect on capital structure

Attributes that effect on capital structure

Null: Unit root (assumes individual unit root process)

Null: No unit root (assumes common unit root process)

** Probabilities for Fisher tests are computed using an asymptotic Chi

Attributes that effect on capital structure