Table of ContentsAbstract......................................................................................................................................2

1 Introduction.........................................................................................................................3

1.1 Problem Statement.......................................................................................................5

1.2 Objective of Study.......................................................................................................5

1.3 Limitation of Study......................................................................................................6

2 Literature Review...............................................................................................................7

2.1 Theoretical studies.......................................................................................................7

2.2 Empirical studies.........................................................................................................8

3 Research Design and Methodology..................................................................................12

3.1 Data............................................................................................................................12

3.2 Research Methodology..............................................................................................14

3.2.1 Research hypotheses..........................................................................................14

3.2.2 Empirical model.................................................................................................14

4 Analysis............................................................................................................................15

5 Conclusion........................................................................................................................19

6 References.........................................................................................................................21

1

Abstract

The basic purpose of my research project is to evaluate the impact of Capital Structure on the

Firms Financial Performance and Shareholders Wealth in Food sector of Pakistan. I have

conducted the regression analysis on my sample data of 30 Food sector firms for the year

2008 to 2013. I use the overall Food sector ROA ROE and EPS ratios as accounting measures

to evaluate the impact of Capital Structure on Firms Financial Performance and Shareholders

wealth. My result shows that the capital structure has negative significant relationship with

ROE and insignificant relationship with ROA and Shareholders wealth.

Keywords: Firms Financial Performance, Shareholders wealth, Optimal Capital Structure,

Return on Equity, Return on Asset, EPS, Debt to Equity ratio.

2

1 IntroductionIn this research project we tried to evaluate the impact of Capital structure on Firm’s

Financial Performance and Shareholder’s wealth. We use two dependent variables that are

Firms performance and Shareholder's wealth to investigate the one independent variable

Capital structure. We tried to analyse the determinants of capital structure and find out the

optimal capital structure that increase the value of the firm’s financial performance and

shareholder's wealth.

First we should know that what it means by Capital Structure. The term capital structure is

used to represent the proportionate relationship between debt and equity. The various means

of financing represent the financial structure of an enterprise. The left-hand side of the

balance sheet (liabilities plus equity) represents the financial structure of a company.

Traditionally, short-term borrowings are excluded from the list of methods of financing the

firm’s capital expenditure. But for our research project we also include short-term borrowings

in shape of working capital requirements of the firm.

Capital structure is that capital structure at that level of debt – equity proportion where the

market value per share is maximum and the cost of capital is minimum. Capital structure

refers to the different options used by a firm in financing their assets. A firm can go for

different levels of debts, equity, or other financial arrangements. It can combine the bonds,

TFCs, lease financing, bank loans or many other options with equity in an overall attempt to

boost the market value of the firm. In their attempt to maximize the overall value, firms differ

with respect to capital structures. This has given birth to different capital structure theories

that attempt to explain the variation in capital structures of firms over time or across regions.

Capital structure and its influence on the firm financial performance and shareholder’s wealth

has been remained an issue of great attention amongst financial scholars since the decisive

research of (Modigliani & Miller, 1958) arguing that under perfect market setting capital

structure doesn’t influence in valuing the firm. This proposition explains that value of firm is

measured by real assets not, the mode they are financed. Only firm’s earning power of assets

influence on value of shareholder’s wealth and profitability.

Jensen & Meckling, (1976) drew concentration to the impact of capital structure on the

performance of enterprises, number of tests as an extension port to inspect the relationship

between performance of firm and shareholder’s wealth. Jensen and Meckling (1976)

demonstrates the amount of leverage in a firm’s capital structure affects the agency conflicts

3

between managers and shareholders and thus, can alter manager’s behaviours and operating

decisions. Since Jensen and Meckling’s argument regarding capital structure influence on

firm performance, several researchers have followed this extension and have conducted

studies aimed at examining the relationship between capital structure and firm performance.

All researches suggest that there is an optimal capital structure the one that maximizes the

value of the firm and simultaneously minimizes the cost of capital thus striking a balance

between risk and return. All the firms do not use uniform capital structure they differ in their

financial decisions because it is not possible to provide financial managers with a precise

methodology for determining a firm’s optimal capital structure. It is a difficult task for

managers to take decision about capital structure where risk and cost is minimized and can

give more profits and also can increase shareholder wealth.

The relationship of decisions about capital structure with firm performance were suggested in

a number of theories, most famous are Modigliani and Miller Theory (1958) and (1963),

Agency Cost Theory (1976), Trade Off Theory (1977) and Pecking Order Theory (1984).

The Modigliani and Miller (1958) theorem which is also known as the capital structure

irrelevance principle was proposed by Franco Modigliani and Merton Miller in 1958. They

argue that under very restrictive assumptions of perfect capital market, investor’s

homogeneous expectations, tax-free economy and no transaction costs, capital structure do

not play any role in determining firm value. Their succeeding preference of entirely debt

financing is due to tax shield, in 1963, was a denial to traditional approaches, which advise an

optimal capital structure, Modigliani and Miller (1963). In actuality, determination of optimal

capital structure is not an easy job, Shoaib (2011). He argues that a firm may need to issue a

number of securities in a combination of debt and equity to meet an exact mixture that can

make best use of its value and having succeeded in doing so, the firm has achieved its optimal

capital structure.

Trade-off Theory by Miller (1977) refers to the thought that a company prefers how much

amount of debt finance and how much amount of equity finance to be used by considering

costs and benefits. According to this, if firms are highly profitable, then they would prefer

debt financing for increasing the shareholder wealth, further debt in a firm’s capital structure

gives more tax benefits. If a firm has low profit, then there is a larger probability of

bankruptcy if it uses more debt.

Pecking Order Theory (POT) is developed by Myers and Majluf (1984) according to this if

firms have high profits then internal financing would be used for new projects which can

maximize the value of shareholders. If retained earnings are not enough, then debt financing

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is preferred and if additional financing is required, equity is issued. The choice of retained

earnings is preferred because it has nearly no cost. A range of research studies was performed

to check the influence of the decisions of capital structure on the firm performance. As capital

structure is chiefly based on two forms of finances that are equity and debt. Use of each form

of financing explains the mixed and conflicting conclusion on firm performance.

Jensen and Meckling (1976) express the sum of leverage in the capital structure of a firm

influences agency conflicts among shareholders and managers, and so can change managers’

behaviours and operating decisions, and it is proved by Ebaid (2009). The survival of

information asymmetry is also a related concern in the decisions of the capital structure,

Sheikh and Wang (2011). Environmental dynamism and competitive environment play a

critical role in making the decisions of optimal capital structure.

If the firms are financing through debt they have to pay the interest to the banks and if they

are financing through equity they have to give the dividends to the shareholders from their

profit and sometimes generate the retained earnings account that they did not distributed to

the shareholders but reflecting their profit. We use the secondary data in our research in the

shape of Firms Financial Performance measures in accounting terms like ROA and ROE

ratios and Shareholders wealth accounting measure like EPS of the firms.

1.1 Problem StatementIt is quite problematic to design specific general Optimal Capital Structure for the firms that

maximize the firm’s performance profitability and Shareholders wealth regardless of their

size and other factors. The decision about the capital structure having the danger of violating

Agency cost theory in our Capital Structure Decisions we have to select the best possible

Capital Structure. The optimal Capital Structure in different countries and in different

economies has different ratios that contribute in the problem of analyzing their impact on

firm’s performance, Profitability and Shareholders wealth.

1.2 Objective of StudyTo find out if there is any relationship between capital structure and firm performance and if

a relationship exists then to find out direction of relationship that whether relationship is

positive or negative.

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1.3 Limitation of StudyIn food sector there are total 51 companies listed on Karachi Stock Exchange (KSE) out of

which 30 companies were selected which were included in KSE 100 index. Because due to

unavailability of required data study sample reduced to 21 companies listed on KSE. We used

data from years 2008 to 2013 because data prior to these years, for some companies was not

available.

Figure1 Frame Work

6

Return on Assets

Debt/Equity RatioReturn on Equity

Earning Per Share

2 Literature ReviewFirst I will discuss the capital structure theories (Modigliani and Miller, trade-off, pecking-

order end and agency cost theory) and then I will discuss empirical study.

2.1 Theoretical studies First of all we discussed the works about the role of debt is Modigliani and Miller (1958).

They claim that owners of the firms are indifferent about its capital structure, because the

value of the firm does not depend on debt-to-equity ratio. Authors consider “an ideal world”

without taxes and any transaction costs. Later Modigliani and Miller (1963) introduce taxes

into their model and show that the value of a firm increases with more debt due to the tax

shield.

Modigliani and Miller’s work initiated further discussions about optimal capital structure.

Since their theory predicts 100% debt financing (due to substantial corporate tax benefit)

which is not observed in practice there should be some trade-off costs against the tax shield.

The actual level of debt is determined by tax advantage and these costs. Economists consider

bankruptcy costs, personal tax, agency costs, asymmetric information and corporate control

considerations as possible trade-off options against tax shield. This is the essence of the

trade-off theory, according to which higher profitability is related to higher leverage due to

the tax shield, but is not at the level of 100% of assets due to trade-off costs.

Myers and Majluf (1984) developed a “pecking order” theory of capital structure, according

to which firms initially use internal funds, then debt, and, if a project requires more funding,

equity. Therefore firms which are very profitable and generate sufficient cash flows will use

less debt.

Further studies of the relationship between leverage and firm performance can be divided into

two groups. The first one is based on the information asymmetries and signalling. Ross

(1977) came up with a model that explained the choice of debt-to-equity ratio by a

willingness of a firm to send signals about its quality. The core idea of Ross (1977) is that it

is too costly for a low-quality firm to abuse the market and signal about its high quality by

issuing more debt. As a result, low quality firms have low amount of debt, and the leverage

increases with the value of a firm. A similar model was developed by Leland and Pyle

(1977): the higher is the quality of the project manager wants to invest in the higher is the

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willingness of the manager to attract financing. That is why a risky firm will end up with

lower debt.

The second group of studies explains the relationship between capital structure and firm

performance through the agency costs theory, developed by Jensen and Meckling (1976) and

Myers (1977). Agency costs are related to conflicts of interest between different groups of

agents (managers, creditors, stockholders).

Thus, these theories provide quite alternative views on the relationship between capital

structure and firm performance.

2.2 Empirical studies The different organizations having the different capital structure that they feel suitable for

them having the different debt to equity mix ratios. The basic goal of every organization is to

set optimal capital structure that increase the firms value in terms of performance and

increasing the share price and having the minimum cost of capital that we have to pay to our

borrowers from which we gave our debt and return that should gave to our equity holders.

Because any immature capital structure decision can increase the cost of capital.

The basic definition of optimal capital structure is setting the most suitable mix of equity and

debt financing for the firms that can contribute in the overall performance of the firm and its

profitability by decreasing the cost of capital normally referred to as Weighted Average Cost

of Capital (WACC).

Raheman, Zulfiqar and Mustafa, (2007) conducted research on 94 non final companies listed

on the Islamabad Stock Exchange (ISE) and used data from 1999 to 2004. Pearson’s

correlation and regression analysis to find relationship between capital structure and firm

profitability were used and after analyzing financial statements of companies it is proved that

capital structure does impact firm profitability. After studying 400 companies from 12 sectors

and listed on the Tehran Stock Exchange (TSE), Pouraghajan, Malekian, Emamgholipour,

Lotfollahpour and Bagheri (2012) found that there is a significant relationship between

capital structure and firm performance. Nirajini and Priya (2013) used data of trading

companies listed in Sri Lanka from year 2006 to 2010 and used correlation and multiple

regression analysis and found that there is a significant relationship between capital structure

and firm performance.

Gupta (n.d.) the firm’s capital structure which increases the shareholder’s wealth and

decreases the firm’s cost of capital is referred to optimal capital structure of the firm. The

8

basic goal of optimal capital structure is to decrease the firms cost of capital and increase the

shareholders wealth and firms overall performance.

Saleem (2013) expressed that the best possible choice of debt and equity share that will

increase the shareholder’s wealth is referred to as capital structure of the firm. In above given

statement the purpose of setting the capital structure is defined as the set of equity and debt

combination that will maximize the shareholders wealth. If you are given the preferences to

the shareholders of the firm by giving them the higher returns you are more focused on the

shareholders wealth maximization that also results in increasing the overall firm’s value in

the market due to the goodwill created in the minds of their investors that are shareholders.

By using some of the literature written by different researchers to evaluate the effect of

capital structure of the firm on Firm’s Financial Performance and Shareholder’s wealth we

will try to inference the results either capital structure of a firm positively or negatively affect

the firm’s financial performance and shareholder’s wealth.

Saleem (2013) revealed that the some expert of corporate finance believed that capital

structure of a firm can maximize firm’s overall value with the help of minimizing its cost of

capital which is very debatable issue discussed in corporate finance theory about capital

structure to evaluate its impact on overall firm’s market value. In above given statement we

can inference the result as some of the corporate finance analysts think that for the purpose of

increasing firms value in the market the firms have to minimize their cost of capital and given

the less returns to the borrowers from which they finance their debt.

San & Heng (2011) suggest that decrease in WACC results in increasing the value of the firm

that is defined as optimal capital structure. There is no any specific formula or theory still

designed to conclusively define the optimal structure of the firm that increase the firm’s

overall value after lots of researches that have conducted on the concept of optimal capital

structure. The process of minimizing the weighted-average cost of capital (WACC) that will

maximize the firm’s value is known as optimal Capital structure selection. There have been

unlimited researches done in regard of designing the theory that equally provides the Optimal

Capital Structure of all the firms but did not succeeded yet.

Saleem (2013) revealed that by maintaining the balance between benefits of debt and cost of

debt associated with that benefit that will results in optimal capital structure according to

trade off theory. For the purpose of reducing agency cost and gain tax shield firms chose to

finance its operations through debt financing. The benefit from debt financing is that the

firms can gain tax benefit and reducing the agency cost by not giving the ownership right to

the equity holders if they go for the equity financing rather than debt financing.

9

In order to analyze the effect of Capital structure on firm’s financial performance we have to

examine the return on assets of that particular firm. The firms purpose is to select the type of

capital structure that increase their returns on assets and in a result increase the profitability

of the firm.

Li & Cui (2003) implies that to increase the worth of equity for shareholders managers make

decisions of financing their operations according to capital structure theories. The basic goal

of the managers is to maximize the value of the firm by attaining higher profits those results

in the maximization of shareholders wealth so we can say that capital structure substantially

affect the shareholder’s wealth.

San & Heng (2011) investigate that there is some kind of relationship between firm’s

financial performance and capital structure of the firm either positive or negative.

Velnampy & Niresh (2012) investigate that profitability of the firm’s is dependent upon the

capital structure decisions of the firm having the different debt and equity combination that

can well suited to increase the profitability of the firm. The important part of the firm’s

financial strategy is to prosperous choice and use of its capital. The relationship between

firm’s capital structure and the firm’s profitability is very significant as the profitability of the

firm can be directly affected by the capital structure decisions of the firms. Decision about

firms Capital structure is very important element in the firms overall strategy.

According to Skopljak & Luo (2012) Agency cost theory defines that difference of the goals

of Managers and the owners of the firms can affect the overall performance of the firm in

terms of its market value and profitability.

Chowdhury & Chowdhury (2010) expressed that in order to increase the shareholder’s wealth

the suitable selection of capital structure of the firm between debt and equity combination

plays the vital role. In order to define firm’s value by implementing the process of future cash

flows discounting technique, WACC is used. The purpose of selecting the right capital

structure of the firms is to maximize the firm’s value, profitability and shareholders wealth.

Soumadi & Hayajneh (n.d.) revealed that in the literature written in corporate finance the

concept of relationship between firm’s performance and capital structure is the most

debatable concept that also given the strong considerations by financial economists of both

financial and non-financial firms.

Berger and Patti (2006) also found a positive relation between capital structure and firm

performance as Abor (2005) found. Over the entire range of observed data, the relationship

between capital structure and firm performance is positively correlated and increase in debt

would lead to better firm performance, Margaritis and Psillaki (2007). Campello (2007)

10

found that if debt is increased and firm’s assets are more tangible then firm’s performance

will also increase compared to the rivals in the market. Jang, Tang and Chen (2008)

examined that firm value increases if only debt is used for financing activities. According to

Cheng, Liu and Chien (2010) if the leverage is at a moderate level, then capital structure will

be positively related to firm performance. Champion (2010) and Morogie and Erah (2010)

also favored Margariti and Psillaki (2007) by finding that profitability is positively related to

capital structure of firms. Chowdhury and Chowdhury (2010) conducted a research on 77

companies listed on the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange

(CSE), results showed that capital structure does impact a company’s performance and the

correlation was strongly positive. Capital structure and firm performance are related to each

other positively, Shoaib and Siddiqui (2011). Mustapha, Ismail and Badriyah (2011)

randomly selected 235 Malaysian companies listed. It was concluded that a positive relation

between leverage and profitability, asset tangibility and firm growth. Firm profitability is

related to capital structure in a positive relation, that is, if capital structure increases, then

profitability will also lead to a reasonable change increase, Aman (2011). Park and Jang

(2013) also found a positive relation between capital structure and firm performance after

examining the data from 1995 to 2008 of 308 restaurant firms. Debt can efficiently be used to

reduce free cash flows and to increase firm profitability, Park and Jang (2013). Capital

structure does impact firm performance in a positive way, Nirajini and Priya (2013) found

after analyzing financial statements of companies in Sri Lanka. Mitani (2014) chose 799

manufacturing firms listed on the Tokyo Stock Exchange (TSE) and presented the evidence

of positive correlation between leverage and market share under both types of competition,

Cournot competition and Bertrand competitions.

Abdul (2012) conducted a similar study to determine the relationship between capital

structure decisions and the performance of firms in Pakistan. The study concluded that

financial leverage has a significant negative relationship with firm performance as measured

by ROA, GM, and Tobin’s Q. The relationship between financial leverage and firm

performance as measured by the return on equity (ROE) was negative but not statistically

significant. In another study, Javed and Akhtar (2012) explored the relationship between

capital structure and financial performance. They concluded that there is a positive

relationship between capital structure and financial performance and growth and size of the

companies. The study which focused on the Karachi Stock Exchange in Pakistan, used

correlation and regression tests on financial data. The findings of the study are consistent

11

with the agency theory. This study however isolated the other financing decisions and

focused only on capital structure.

By looking at all above discussed researches we can conclude that the relationship between

the firm's capital structure and the firms overall performance, profitability and shareholders

wealth is present. The firms should look for the optimal capital structure that minimize the

WACC and maximize the firm’s value and their share price to maximize shareholders wealth.

To measure the financial performance of the firm we can calculate the financial ratio related

to the income statement and balance sheet of the firms and try to analyze the impact of capital

structure of the firm on these financial ratios that adversely or positively impact the firm’s

performance.

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3 Research Design and MethodologyThis section further comprises of two sub sections. Section 3.1 explains data and 3.2 explain

the research methodology.

3.1 DataThe reference period of the study is of six years which is from the financial year 2008-

2013.In these study thirty (30) firms of Food sector of Pakistan has been taken as sample. All

the sample firms are listed in Karachi stock exchange in Pakistan and the data-base of the

study is completely based on secondary data which has been collected from various web sites

and annual financial reports of the sample firms. For the purpose of achieving the objectives

of study the Profitability Ratio return on equity, return on assets and earning per share are

taken as dependent variable and debt-to-equity ratio is taken as independent variables.

Table1

Variables Measurements

Variable Measures

Dependent Variables

Profitability ROE, ROA, EPS

Independent variables

Capital structure Debt/Equity Ratio

Notes: Above table shows that profitability is our dependent variable and it is measured by net income divided by average equity and net income divided by total assets and net income divided by weighted average number of shares . We use capital structure ratios as independent variables.Data Source: Karachi stock exchange

Explanation of variable:

Table 1 explains about the dependent and independent variables used in this research study.

As above table shows debt- to-equity is our independent variable, while return on assets,

return on equity and earning per share is our dependent variables. The debt-to-equity ratio

means the firms indicates what proportion of equity and debt the company is using to finance

its assets. Total liabilities/Total shareholders’ equity measures of a company's financial

leverage. Total liabilities include short term liabilities, reserves, deferred tax liabilities, non

controlling interest, and any other noncurrent liability.

The return on equity ROE means amount of net income returned as a percentage of

shareholders equity. Return on equity measures a corporation's profitability by revealing how

much profit a company generates with the money shareholders have invested. Net

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income/Total assets an indicator of how profitable a company is relative to its total assets.

ROA gives an idea as to how efficient management is at using its assets to generate earnings.

Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a

percentage. Sometimes this is referred to as return on investment. Net income/Weighted

average no. of shares EPS represents the portion of a company's profit allocated to each

outstanding share of common stock. Earnings per share serve as an indicator of a company's

profitability.

Table 2

Summary Statistics of Food Sector of Pakistan

Variables MEAN STD.DEV MIN MAX

ROE 1.42 15.867 -3.2664 212.83

ROA 0.45 0.222 -1.96 0.78

EPS 17.09 45.79 -51.35 301.14

D/E Ratio -12.13 174.85 -2341.85 39.5

NOTES: Table 2 explains the summary statistics of food sector of Pakistan. Mean is central tendency,

STD.DEV is standard deviation, MIN is minimum value, and MAX is maximum value. ROA is return

on assets, ROE is return on equity, EPS is earning per share and D/E ratio is Debt-to-Equity ratio.

Data source: Self calculated on state bank data of Pakistan.

Table 2 enlighten the descriptive statistics of food companies in Pakistan. Descriptive

statistics means a set of concise illustrative coefficients that abridges given information set,

which can either be a representation of the whole populace or a specimen. The measures used

to depict the information set that are measures of focal propensity and measures of variability

or scattering. Descriptive statistics is a useful way to summarize the data and it gives us the

meaningful results by performing empirical and analytical analysis, as they give a past

account of return behavior. Even though past information is helpful in any analysis, we

should always think about the prospect of future events. Measures of central tendency contain

the mean, median and mode, on the other hand measures of variability contain the standard

deviation (or variance), the minimum and maximum variables. The above table shows the

mean, standard deviation, maximum and minimum values of our dependent and independent

variables. Mean is the basic numerical average of a set of two or more numbers. The mean

can be calculated in more than one way. We can calculate the Mean by using Arithmetic

14

mean and Geometric mean. Standard deviation is used to find the dispersion in a data set.

More dispersion in a data set means higher the standard deviation. Standard deviation is the

square root of variance .Maximum and minimum shows the highest and lowest value in a

data set.

3.2 Research MethodologyIn this research, to test the impact of independent variable on dependent variable multiple

linear regression models are used. This section is further divided into two sub sections where

sub section 3.2.1 explains Research hypotheses and sub section 3.2.2 represents Empirical

model.

3.2.1 Research hypothesesH1: There is a significant positive relationship between the capital structure and financial

performance of selected firms.

H2: There is a significant negative relationship between the capital structure and financial

performance of selected firms.

H3: There is a significant positive relationship between capital structure and shareholders’

wealth of selected firms.

H4: There is a significant negative relationship between capital structure and shareholders’

wealth of selected firms.

3.2.2 Empirical model

ROE=β0 + β1 (D/E Ratio) + ε

ROA= β0 + β1 (D/E Ratio) + ε

EPS= β0 + β1 (D/E Ratio) + ε

Where:

ROE stands for return on equity and β0 is intercept, β1 coefficients of our research.β1 is the coefficient

of Debt-to-equity ratio

ROA stands for return on assets and β0 is intercept, β1 coefficients of our research.β1 is the coefficient

of Debt-to-equity ratio.

EPS stands for earning per share and β0 is intercept, β1 coefficients of our research.β1 is the coefficient

of Debt-to-equity ratio.

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4 Analysis

This section explains the results and analysis of our research study. To test the impact of

explanatory variable on dependent variable multiple linear regression models are used. First

of all data is tested for correlation. Correlation is an association among two variables or one

variable with other variable.

Table 3

Correlation among Explanatory Variables for Food SectorVariables D/E ratio ROA ROE EPS

D/E ratio 1

ROA 0.046 1

ROE -1 -0.056 1

EPS 0.56 0.35 -0.045 1

Table 3 explains the Correlation results of food sector of Pakistan. Correlation is used to

measure how two random variables are related. Because standard deviation is always

positive, the sign of the correlation between two variables must be the same as that of the

covariance between the two variables. If the correlation is positive, we can say that variables

are positively correlated. If it is negative, we can say that they are negatively correlated; and

if it is zero, we say they are uncorrelated. Furthermore, it can be proved that the correlation is

always between +1 and -1. ROA is also positively correlated with D/E ratio. ROE is

negatively correlated with D/E ratio. It also shows there is a significant relationship between

variables. EPS is positively correlated with D/E ratio.

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Table 4

IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING LINEAR REGRESSIONS

ROA COEF T VALUE P>=ǀtǀ

Intercept 00.46

(0.0166)

2.78 0.006

D/E ratio 0.000058

(0.00095)

0.61 0.541

Notes: R2=0.0021, Adjusted R2= -0.0035, No of obs. 180, Prob. > F 0.54 COEF is coefficient and it

shows the impact of independent variable on dependent variable, PROB is probability. Intercept

depicts that there are other factors that impact our dependent variable other than variables used in our

study.

Data source: Self calculated on state bank of Pakistan data.

Table 4 demonstrate the regression analysis used to find the relationship among return on

assets and debt to equity ratio. R2 explicate how much independent variable explains the

dependent variable, while adjusted R2 tells about the model fit. Intercept depicts that there are

other factors that impact our dependent variable other than variables used in our study. The

result shows that ROA has insignificant positive relationship with debt-to- equity ratio, which

means that an increase in debt-to-equity by one will increase the ROA by 0.0058%.

Significance level is not less than 5% so there is insignificant relationship exists between

these variables.

Table 5

17

IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING LINEAR REGRESSIONS

ROE COEF T VALUE P>=ǀtǀ

Intercept 0.32

(0.68)

4.63 0.000

D/E ratio -0.091

(0.003)

-229.86 0.000

Notes: R2=0.99, Adjusted R2=0.99, No of obs. 180, Prob.>F= 0.000 COEF is coefficient and shows

the impact of independent variable on dependent variable, PROB is probability. Intercept depicts that

there are other factors that impact our dependent variable other than variables used in our study.

Data source: Self calculated on state bank of Pakistan data.

Table 5 demonstrate the regression analysis used to find the relationship among return on

equity and debt to equity ratio. R2 explicate how much independent variable explains the

dependent variable, while adjusted R2 tells about the model fit. Intercept depicts that there are

other factors that impact our dependent variable other than variables used in our study. The

result shows that ROE has significant negative relationship with debt-to- equity ratio, which

means that an increase in debt ratio by one will decrease the ROE by 9.1%. Significance level

is less than 5% so there is a strong relationship exists between these variables.

Table 6

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IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING LINEAR REGRESSIONS

EPS COEF T VALUE P>=ǀtǀ

Intercept 17.27

(3.43)

5.04 0.000

D/E ratio 0.015

(0.020)

0.74 0.46

Notes: R2=0.0031, Adjusted R2= -0.0026, No of obs. 180, Prob.>F= 0.46 COEF is coefficient and

shows the impact of independent variable on dependent variable, PROB is probability. Intercept

depicts that there are other factors that impact our dependent variable other than variables used in our

study.

Data source: Self calculated on state bank of Pakistan data.

Table 6 demonstrate the regression analysis used to find the relationship among earning per

share and debt to equity ratio. R2 explicate how much independent variable explains the

dependent variable, while adjusted R2 tells about the model fit. Intercept depicts that there are

other factors that impact our dependent variable other than variables used in our study. The

result shows that EPS has insignificant positive relationship with debt-to- equity ratio, which

means that an increase in debt ratio by one will increase EPS by 1.5%. Significance level is

not less than 5% so there is insignificant relationship exist between these variables.

5 Conclusion

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The purpose of this research study is to determine relationship between capital structures and

profitability of food sector of Pakistan. For this purpose 30 food sector firms selected as study

sample and data is collected for the period of 2008-2013. In this study debt-to- equity ratio

used as independent variable while ROA, ROE, EPS used as dependent variables. First of all

data is tested for correlation in order to check the association between explanatory variables.

The results show that there is insignificant relationship between ROA and D/E ratio and EPS

and D/E ratio. Similarly there is a significant relationship between ROE and D/E ratio. To

test the impact of explanatory variable on dependent variable we utilize linear regressions

model. Results demonstrate that there is a negative relationship between capital structure and

profitability and there is insignificant relationship between shareholders wealth and capital

structure so reject both H3 and H4. Since the capital structure has strong negative relationship

with ROE, so accept H2.

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Future Study

 I carry out the research on the topic of impact of capital structure on the profitability of food

sector of Pakistan. In order to expand this topic it should be look at by other researchers as

this area demand a lot of work for making Pakistan development. The Government of

Pakistan should award more importance to its all aspects in an effectual way. In this research

study i have worked on the secondary source of data so policy makers of food sectors like

health commission of Pakistan should given more importance to the primary source of data

collection for this topic of research. Due to shortage of time my study is bound with tight

period of time schedule as six years data collection it should be given long period of time in

order to get more meaningful and better results. As food sector is growing day by day, it

requires effective marketing strategies to expand business. Researches need to identify

effective strategies to help the managers of food sector. For precise marketing policy for food

company would be to construct on confirmed calculated marketing ideology, along with a

spotlight on varying purchaser manners. Bring into cooperation of digital media in the course

of Internet marketing plan for improving effectiveness and awareness to consumers is the

best marketing strategy that can provide the foundation for a transformed business model. On

the other hand, there should be some forecast for using digital media for marketing too. It

should be a multi-channel marketing scheme but should recognize the target viewers. The

focus should be on the high value purchaser sector for food produce. To prepare for a

marketing strategy, it is also vital to know the active markets as well as up-and-coming

markets of food for the productivity in this sector.

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Mubin Mujahid & Kalsoom Akhtar . Imact of capital structure on Firm Financial Performance International Journal of Learning & Development ISSN 2164-4063 2014, Vol. 4, No. 2

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