CHAPTER 1

INTRODUCTION

Page | 1

Introduction
Capital structure is one of the most important topics in the field of finance. Capital
structure plays an important role in performance of the firm, if the firm uses it
efficiently. The capital structure is how a firm can finances its expenses by using
different mediums of funds. The mixture of total debt and equity is known as
Capital Structure. The theory of capital structure defines that what amount of debt
and equity should be taken for balancing the cost and benefits of a firm. It might be
possible that capital structure leads to bankruptcy or has negative effects on
financial performance of the firm. Financial performance is measure of that how
well the firm is going, utilizing their assets and resources in efficient manner to
make profit.
Many researches have been conducted on this area to determine the impact of
capital structure on financial performance of a firm for different countries. Miler
and Modigliani (1958) gave the theory of irrelevance of capital structure to the
firms value in perfect competition. This theory provides basis for further
researches in this area. There are many other researches who find out the impact of
capitals structure on financial performance of a firm. El-Sayed Ebaid (2009)
concuded that there is no singnifacant impact of capital structure on firm
performance. Bokhari and Khan (2013) also shows that the impact of capital
structure is negatively correlated with financial performance of the firm. . Nour
Abu-Rab (2012) resolved that there is positive relation between the capital
structure and performance of firm.
Researches are conducted in different countries and shows different results on
impact of capital structure on financial performance. This shows that there is no
hard and fast rule of relationship between capital structure and firms performance.
Page | 2

The impact can be different from sector to sector or from country to country
because circumstances do not remain same all over the world. This study finds out
the impact of capital structure on financial performance of firm of Textile sector of
Pakistan by using data of 3 years. In Pakistan few research works have been
conducted on this issue. This research study tries to explore this area in Pakistan
and encourages other researchers towards this topic.

Research Objectives
The objective of this study to find out that:
To investigate relationship between capital structure and financial
performance of a firm
Which capital structure decisions effects the financial performance of a firm
And also recommend possibilities to make financial performance better.

Research Questions
This study intended to find out the answers of following questions.
Q1: What is the relation between the Capital Structure and Financial
Performance of a firm?
Q2: Whether the debt and equity have the same or different impact on
financial performance?

Problem Statement
The capital structure indicators Total Debt and Equity will shows their impact on
performance indicators Return on Asset (ROA) and Return on Equity (ROE).

Page | 3

Hypothesis:
The following hypotheses have been tested in this research:
H1 There is no positive relation between TDA and ROA
H2 There is no positive relation between ETA and ROA
H3 There is no positive relation between TDA and ROE
H4 There is no positive relation between ETA and ROE

Page | 4

CHAPTER 2
LITERATURE REVIEW

Page | 5

LITERATURE REVIEW:The theory of irrelevance of capital structure was presented in (1958) by Miler and
Modigliani. This theory explained that there is no relation between capital structure
and firms value. This theory provided the basis for further researches in this area.
The impact of capital structure on firm performance in Egypt was also investegated
by taking the sample of non-financial Egyptian listed firms from 1997 to 2005. The
Multiple regression analysis is used for finding the effects of capital structure and
also to find the relation between the leverage level and firms performance. To
check the financial performance three measures were used. The results of the study
reveals that there is negative impact of capital structure on ROA. On the other
hand, capital structure has no significant impact on firm performance measured by
ROE (El-Sayed Ebaid, 2009).
Bokhari and Khan (2013) conducted a research on the impact of capital structure
on firms performance from the non financial sector of Pakistan. The sample data is
taken from the 380 firms for the years from 2005 to 2011. A regression tool was
used to analysis the data by SPSS Software. In this research Return on Assets
(ROA), Return on Equity (ROE), Net Profit Margin (NPM) and Earning per Share
(EPS) are variables used for measuring the performance of firm whereas Short
Term Debt (STD), Long Term Debt (LTD) and Leverage of the Firm or Total Debt
(LEV) are variables for the capital structure. They conclude that STD, LTD, LEV
has negative affect on ROA, ROE and EPS while STD, LTD, and LEV shows
positive effect on NPM.
Ojah Patrick, Joseph Orinya, and Kemi (2013) Investigate the impact of capital
structure on financial performance of firms of Nigeria. This study finds out the
Page | 6

effectiveness of firms performance by identifying the relationship between

leverage and financial performance and also between macroeconomics with
financial performance. The data is taken from the secondary sources of firms for
the years from 2000 to 2010. A static panel analysis was used to determine
conclusions. The conclusion that derives from this study represents that leverage
has negative effect on financial performance whereas macroeconomics have
significant effect on financial performance.
Reza Ebrati, Emadi, Balasang, and Safari (2013) This study finds out the impact of
capital structure on financial performance of Ukrainian firms and also the direct
effects of leverage on firm performance by taking the samples of 16.5 thousand
firms over the years 2001-2010. And finds the relationship of capital structure with
the firm by applying techniques of least square variable regression with standard
error and conclude their effects. This study concludes that the financial leverage is
negatively correlated with financial performance and debt behavior of Ukrainian
firms is not according to the free cash flow theory of capital
Chowdhury and Chowdhury (2010) The study objects to find out the impact of
capital structure on value of firm in Bangladesh economy and also to find out the
optimal capital structure to make market firm value better. To get success in
objectives this study takes secondary data of 77 public listed company from Dhaka
Stock Exchange and Chittagong Stock Exchange and analyze them by applying
some statistical tools. The results this study generates are for maximizing the
wealth of shareholders a perfect combination of debt and equity is required
whereas cost of capital has negative correlation with its decision. From the analysis
it is observed that b changing its current ratio, operating leverage, EPS, dividend
payout ratio the firm increase its value.

Page | 7

Page | 8

CHAPTER: 3
METHODOLOGY

Page | 9

Methodology:
The data of 3 companies over five years is taken to examine the relationship
between capital structure and financial performance.

Page | 10

REFRENCES
Bokhari, Haseeb Wadood, & Khan, Muhammad Arif. (2013). The Impact of
Capital Structure on Firms Performance (A case of Non-Financial Sector of
Pakistan). European Journal of Business and Management, 5(31), 111-137.
Chowdhury, Anup, & Chowdhury, Suman Paul. (2010). Impact of capital structure
on firms value: Evidence from Bangladesh. Business and Economic
Horizons(03), 111-122.
El-Sayed Ebaid, Ibrahim. (2009). The impact of capital-structure choice on firm
performance: empirical evidence from Egypt. The Journal of Risk Finance,
10(5), 477-487.
Ojah Patrick, Ogebe, Joseph Orinya, Ogebe, & Kemi, Alewi. (2013). The Impact
of Capital Structure on Firms Performance in Nigeria.
Reza Ebrati, Mohammad, Emadi, Farzad, Balasang, Reza Saadati, & Safari,
Ghorban. (2013). The Impact of Capital Structure on Firm Performance:
Evidence from Tehran Stock Exchange. Australian Journal of Basic &
Applied Sciences, 7(4).

Page | 11