CHAPTER 01

INTRODUCTION TO THE REPORT

Chapter 1

INTRODUCTION TO THE REPORT

This section provides a brief introduction to the topic and background of the study, scope and purpose of the study, scheme of the report and in last it fully describes the performance of cement industry.

INTRODUCTION TO THE TOPIC

Capital structure is the different mix of proportion of debt and equity in a firm. The capital structure require a corporate level decision because it effect the firm overall performance and continuation in competitive or in non competitive environment. From the study I observed that a lot number of firms are failed to meet their long term projects dead lines because of non effective decision. There are numerous factors that effect the firms finest capital structure decision. The basic resources of financing from which business can finance are, the Retain Earning, by issuing of New Equities, and by raising funds through Short term bonds or Long term bonds, TFCs, Lease financing, and Bank loans etc The capital structures decision is at the center of many other decisions in the area of corporate finance. This study will attempt to answer the subject matter what are the determinants of the capital structure of Pakistan Cement Industry? In other words, my job as a canvasser is to identify the potential determinants of capital structure in Cement Industry of Pakistan and up to how much extent it could effect by different factors.

1.2 BACKGROUND OF THE STUDY

In the field of corporate finance, a lot work of has been done on capital structure and on their determinants but unfortunately in Pakistan there is little work done in this field. If we talk about the capital structure then we elaborate the topic that who done there CHAPTER 01 INTRODUCTION TO THE REPORT

endeavor work on this phenomenon. The first work was done by Modigliani and Miller 1958 who give birth to the others theories like the POT, TOT & ACT etc.., There are other empirical works are done by different researcher like Rajan, R., and L. Zingales (1995) they done their research on well developed G-7 countries on other side the Booth et al 2001 are done their research on ten (10) developing countries including Pakistan too. Other researcher done their research on different issues that raise up during the setup of optimal capital structures like Jensen and Meckling1976 solving the transformation problems of management, Haugen and Senbet 1978, Titman 1984 discuss about bankruptcy cost and Myer and Majluf 1984 argue about asymmetric information and also give a brief view about pecking order theory as well. While in Pakistan the Shah and Hijazi 2004 & Shah and Khan 2007 done their work on all listed non financial firms on KSE and they defined the determinants at different angles and conclude in very optimistic way in the allusion of different theories.

1.3 PURPOSE OF THE STUDY

The main theme of my research is to provide an exclusive learning practices and Opportunity for the business and management students and professionals that how to take decision in-between equity and debt financing (Capital Structure). This overview is aimed at analysis of Cement Industry in a systematic way that gives authentic & appropriate instruction for anyone who has financial understanding of this arena.

1.4 SCOPE OF THE STUDY

1. To determine the capital mix at their optimal level in target industry (Cement Industry).

2. Generally it covers every facet of the area under discussion but particularly it is interrelated to the critical and theoretical analysis of Cement Industry of Pakistan.

CHAPTER 01

INTRODUCTION TO THE REPORT

3. This research could provide helpful guidelines for the student of business administration and management.

1.5 SCHEME OF THE REPORT

The first section (Chapter 1) describe the brief introduction about the topic and also small reflection form the Cement Industry of Pakistan & about their performance, section two (Chapter 2) describes some theories related to the capital structure and this section also include literature review (previous empirical findings) and theoretical background, while the section three (Chapter 3) describe about data collection (source of data), variables justification, statement of hypothesis and model specification , section four (Chapter 04) describe the data analysis and their results and section five (Chapter 05) depict the conclusion.

1.6 LIMITATIONS
1) There were rare amount of paper are available at free cost on net, due to this reason I didnt go in as much as in detail require for study. 2) Due to the unavailability of data only eighteen (19) firms are taken under consideration as a sample. 3) Due to the shortage of time i kept small theoretical frame work for conducting of research.

1.7 ABOUT THE INDUSTRY

In 1947 there were only four firms (Cement Plants) which were inherited in the time of division with the total capacity of 0.5 million tons. Privatization in1990 change the whole industry and new firms came in to the market. Now a day there are twenty-nine (29) firms of cement are operating in Pakistan in which nineteen (19) firms are operating in north side of the country with production capacity of 35.18 million tons which contribute a part of almost 80% of the total production, CHAPTER 01 INTRODUCTION TO THE REPORT

while in the south side only ten (10) firms are operating with production capacity of 8.89 million tons which contribute a part of 20% of production so the total production capacity according to the business recorder is 44.07 million tons now a day. Cement Industry play an essential role in the development of economy. There are five type of cement produced in Pakistan. In Pakistan the cement industry is operating at their booming level due to industrial and commercial constructions and most of the firms are located near to mountain areas. It also provides an opportunity for the jobless peoples from business recorder it is noticed that it recruited about 150,000 persons in last decade. It also contributes about Rs. 30 billion to the income tax department. Due to in international demand the Pakistan Cement Industry jumps into international market because of the good quality products and well reputed too in 2007 the Pakistan Cement Industry exported round about 7.716 million tones and earns $450 million US dollars & in 2008-09 it exports about 11 million tons and earns $700 million USD. By the business recorder in 2009 the export quantity are increased by 30% as compared to the previous year so the Pakistan become on number five top exporter of cement in the world lift beheading Germany, but on other hand the local sale value decline up to 15% from 12.59 to 10.77 millions USD by the researcher they says that in coming five years the local sale could increases by the 13%(expected). According to Business Recorder the industry has a good opportunity of exporting cement that the Sri Lanka which demanded about 30,000 tones cement per month while in 2007 Pakistan exported 130,000 tones of cement to India and 2.13 million tones to Iraq, Afghanistan and UAE. The exporting of cement to India is just become slowly because of

tariffs by Indian authorities. The major problem faced by the industry is taxation policies the GST in Pakistan on cement is 186% higher then India, these taxes and other general duties increases about 40% cost of production the total tax and excise duty per tone become Rs. 900 which propionates about Rupees 96 tax / bag which is recorded highest in the world. The total cost per bag/50Kg is now Rs. 193 which makes per bag/50Kgs Price Rs. 235. CHAPTER 01 INTRODUCTION TO THE REPORT

The per capita consumption of cement in Pakistan is 131Kg, while in India it is 135Kg but both are below then World Average per capita consumption of 270Kg.

On other side there are some challenges are also facing by Pakistan Cement Industry like cost and export, due to, in the USD causing coal, variable costs (electricity charges) and fright charges, it consist of 60% to 70% of the cost too and also the high interest rates inflationary distress which make the investors interest low in investment. And the Cement Industry imports coal and pet from India as a fuel for production.

Source: www.brecorder.com

CHAPTER 02

LITERATURE REVIEW

Chapter 2

LITERATURE REVIEW
In this section I explained the basic theories of capital structure which provide helpful information about capital structure that what are the basic factors that could affect it at different level. In this section i also tinted the empirical studies regarding determinant of capital structure

2.1 DIFFERENT THEORIES ABOUT CAPITAL STRUCTURE

2.1.1 M & M THEORY (1958) (IRRELEVANCE THEORY)

This theory is also called the basic theory of capital structure because M&M present this theory first time in field of corporate finance. This theory suggest that the firms leverage level didnt affect by any proportion of debt level in capital structure, if there is no taxes, no bankruptcy cost, no asymmetric information, and also there must be an efficient market as well but all of these assumption of M&M didnt be applied practically there for this theory is also known as irrelevance principle. After some time (1963) there is another assumption presented by M&M which correct some of the drawbacks presented in first preposition. The firm overall value is affected by inclusion of corporate tax because the debt is tax deducible so if we vary the debt level then the firms value also changes.

2.1.2 PICKING ORDER THEORY (POT)

There is asymmetry information exists between manager and investor from different studies it is clear that the investor perceptions indicate that mangers have better source of information then external investors. CHAPTER 02 LITERATURE REVIEW

Mostly there are three source of financing retain earning, debt financing and equity financing. According to this theory if the firm is capable that it could raise funds internally that the firm should go for retain earning rather then other type of financing. If the firm is growing firm then exterior financier will claim of high yields on debt and equity. This assumption state that the better source of financing is retains earning. If the firm is capable then it should finance their all projects by retain earning if not then it should go for short term debt financing and then lastly go for equity financing.

2.1.3 AGENCY COST THEORY (ACT)

This theory became from separation of ownership and control. According to this theory there are conflicts remain between the managers and different investors. To gain the optimal capital structure there should be a way to cope these conflicts among these different parties. If the firm is capable to cover the financial distress then the equity holder could encourage the managers to take a part in invest in risky projects. On other side the bond holder demand higher interest rate, if firm is capable to make interest payment on there due dates it could decrease the conflicts level in firm operating decision. Otherwise there will conflict exists among these parties. As the management having less amount of stake in business so they may take part for their own advantage of free cash flow instead of the enlargement the firms worth in the market. And there could also be the problems arise of overinvestment and underinvestment among the bondholders and stockholders. So the Jensen 1986, Stultz 1990 urges so as to the dilemma can be solved via mounting the debt level in firm or by increasing the stake amount in management to reduce the free cash flow level. 7

2.1.4 TRADE OFF THEORY (TOT)

This theory also acknowledged as tax (tariff) base speculation. According to this theory the firm could have an optimal capital structure, if the firm balances its cost like bankruptcy and financial distress with tax advantage of debt financing. As we know that CHAPTER 02 LITERATURE REVIEW

interest is tax deductible so debt level being as a way of decreasing of payment of tax and also a way of rising after tax cash flows. On other side if a firm take a decision to go for higher debt level, so here could be chance of shifting of management power to bondholder from stockholder and also if the firm is not able to repay the debt so there will be the firm faces chance of bankruptcy and the firm could go towards decrease in the market share price of the firm (shareholder wealth).

2.2 EMPIRICAL STUDIES REGARDING DETERMINANT OF CAPITAL STRUCTURE (LITERATURE REVIEW)

(Modigliani-Miller 1958) Their assumption is also known as the parent theory assumption. This assumption state that firm leverage level is independent its mean that it doesnt matter that up to how much extent the firm finance by debt level, if there is no taxes, no bankruptcy cost, no asymmetric information, and also there must be an efficient market as well, but all of these assumption of M&M didnt be applied practically there for this theory is also known as irrelevance principle. After some time (1963) there is another assumption presented by M&M which correct some of the drawbacks presented in first preposition. (Stenbacka R & Toombak, Feb 2002) In their research they take the financial data on 3,119 non private telecommunication and manufacturing firms for the period of 1982 to 1992. According to their research if the firms are new to the market they should go first to the debt financing (agency cost theory) so the entail raised fund could help them to earn more and it could also open a way for retain earning then the firm could be able to acquire of both debt and equity by taking advantage of the complementarities identified in between these instruments. So this might assist them in firm expansion.

In their finding they took the dependant variable as debt to equity ratio for proxy of leverage and the independent variables are nature of the capital market, capital investment and internal funds. In further research they found that not as good as rating have negative impact on quantity of new equity and the high interest rates to have a negative impact on the quantity of debt fund. CHAPTER 02 LITERATURE REVIEW

(Chaganti and Damanpour Oct 1991) In their research they assume that change in institutional investor manners could affect the power relationship in a firm, & then the firms performance too. In the research the researchers have main two questions that, the relationship among outside institutional stockholding on the one hand and the firm performance on another and secondly the internal stockholders (employee stock ownership planes, family owners) have an effect on those relationships. They mention in the research that outside institutional owner have great impacts on firm external financing and performance. In study they find that the firms heavily held by institutional investor have relatively low leverage & high ROEs. And the outside investors have also enduring effect on other ratio as well like ROA, P-E ratios. (Balakrishnan and Fox, Jan 1993) in the research they took the sample of 295 single business firms for the period of 1978-87 and four firms per industry as they did research on the firms whose operating in the similar industry so they will face the same demand and supply circumstances and also facing the same risk too. So this means that leverage level will fluctuate thoroughly across businesses. In their research they find that that the leverage could be affected by certain determinants of capital structure such as, Earning volatility (RISK), Research & Development intensity (R&D) and Advertising intensity (ADVERT) and Growth Opportunities (GROWTH) and observed negatively relation of these factors, And only the one Independent variable which is effect it positively is Depreciation (DEPRN). The models which are used in the research were Variance components model and Error components model. (Rajan, R., and L. Zingales (1995)) As they did their research about the listed firms in US and other developed countries and they says that large firms suffer less from

information asymmetry, making it is possible for them to issue equity at favorable term. This would suggest that they have less debt in their capital structure since they would prefer to issue equity. They concluded that consequence of size on balance debt level is ambiguous CHAPTER 02 LITERATURE REVIEW

According to them a number of agency problems such as the asset substitution & the debt overhang problems are best investigated using stock measure of leverage. They use the dependant variable as debt/equity ratio for proxy of leverage and independent variables are tangibility which is positive and the negative effected variables profitability, growth and size. (Farooqi-Lind) In this paper the researcher examine the capital structure choices of nonlisted (167,822) firms in Sweden for the period for 1997-1999 & later assess it to the listed (605) firms. They find different number of issues in the assessment of non-listed & listed firms and also discover different forces that affect the leverage and their magnitude of the affecting by variables (independent) which affect the optimum capital structure at different levels. In the research like the other researcher they took dependant variable as a debt to equity ratio for proxy of leverage and independent variables which affect the leverage at different intensity like NDTS of listed firm be positively correlated with leverage and negative related to the non-listed firms. In the research they found tangibility is the primarily effectual determinant of the capital structure they found that tangibility of non-listed firms are highly leveraged then listed firms while the size, profitability, growth and income variance are negatively related to non-listed and listed firms. In research they use the regression model and t-test for significant level. (Shah & Hijazi 2004) In the research they attempts to determine the capital structure of Pakistani non financial firms listed on KSE. In the paper they discuss some prior research papers about the capital structure. They inspect 445 firms out of 2225 firm.

10

In their finding they take the dependant variable as proportion of the debt to equity and the self-determining variables are profitability negative , size positive , tangibility positive and growth negative of the firms. They used regression analysis model in their research. (Shah & Khan 2007) As they used two panel data analysis, for the determinants of Capital structure. They have done their research on non financial firms which are recently listed on KSE. 286 firms are taken under study by excluding of the firms having at least 3 CHAPTER 02 LITERATURE REVIEW

Std. deviations for the period of 1993-2002. In their the dependent variable is leverage which effected by the independent variable in deferment dimensions like positive correlated variables are tangibility, size (not significant), & negatively related variables are growth, profitability, but the depreciation is still not significant and earning volatility having zero value mean it has no impact on leverage. In research they use two models the Constant Coefficient model and The Fix effects model. In the last they find that the tangibility is the basic determinant of capital structure. (Mazhar A & Nasir A, 2006) They also done their research on this arena They took 91 NFF out of 241 NFF intended for the era of 1999-2006, which are listed on the Islamabad Stock Exchange, 80 of them are private owned firms while the remaining 11 firms are government owned firms. In the research they used the dependant variable as leverage while the independent variables were used as growth rate, size, profitability, ROA, tangibility, and tax provision. For the descriptive statistics they used the regression analysis and spearmans correlation models. According to their finding the private firms have a lesser amount of leverage level then Government owned firms. In there finding they find inverse correlation of the debt level to profitability, tangibility, & ROA while the size, growth, and tax rate are positively co-related. (Jasir Ilyas 2007) In his study the researcher took the data of 364 non-financial firms for the period of 2000-2005 which all of them are listed on Karachi Stock Exchange. In his study he find that the firms leverage level depend on several factors like Size of the firm, firms Profitability, Assets Tangibility, Growth Opportunity, NDTS, Tax. In his research he used two types of data analysis OLS & WLS method. In his research he find the negative

11

relationship with Profitability, size, and financial leverage on other hand the positively correlated variables were the firm Tangibility and Taxes, in last finding he find that Growth is negatively related by OLS and positively related by WLS while the Non debt tax shield were find opposite of growth. According to his finding the Cement Sectors leverage were 40% effected by independent variables but the model were significant by using of WLS in which the R-Squire shows CHAPTER 02 LITERATURE REVIEW

92% co-related. In Pakistan the bond market is not such developed as in developed countries. By researcher Pakistani firms mostly prefer equity financing and short term financing. (Abor and Biekpe 2005) In research paper they researcher discuss the main determinants of capital structure. They took the data of listed firms on GSE for the period of six years. They used the dependant variable in their finding as usual taken by other researcher as leverage and independent variables in which the growth and size are positively related and other variables such as risk, profitability (supporting the POT), asset tangibility & tax has inverse correlation to debt level. In the research the researcher used the ordinary least square regression model for their findings. Further they find that the firms with high level of business risk then they have less chance of capability to maintain the financial risk. (Salehi & Biglar Jan 2009) According to their research whether the capital structure decision affects the firms performance and for their research they took the sample of 117 firms listed on (TSE) for the period of 2002-2007. They check the different variable like Market value, Book value and adjusted value that these could be affected by Financial Performance measures like, ROI, ROE, RET, EBT/S, OPR/S. In the result they find that collectively it is inversely correlated to the leverage but during further finding they concluded that the return on stock have positive effect. For the research they use the regression model, ANOVA testing procedure and Pearson correlation coefficient by SPSS. (Bauer P Nov 2002) They took the sample total of 72 non financial firms listed in (PSE) for the period of 2000-2001. In the research they discuss the determinant of capital structure and relationship between industry classification and leverage too. The

12

independent variables used in the research are size, Tax and dummy variables (manufacturing and production) as resulted positively related while ROA, tangibility, P/B ratio, non debt tax shield and dummy variables(mining of raw materials) are negatively related while by comparing with G7 countries volatility is not significant. In their finding they divide the industry in different categories with the taking the aggregate as a leverage and then compare it with G7 countries. The result shows the same result of Czech CHAPTER 02 LITERATURE REVIEW

Republic in contrast with G7 countries by comparing the book value which it shows high leverage by comparing with market value. And in the paper the P/B ratio was calculated very low as compare to other countries. (Samuel G. H. Huang and Frank M. Song 2002) In the research paper the researcher give the idea about the basics of determinants of capital structure of more than thousand listed Chinese listed firms for the period of (1994-2000). The data for this paper was collected from the CSMAR The main finding of their research is about the state-controlled listed companies which they suppose that these firms become profit maximizing firms, which the state doesnt hand over the controlling right and then discuss the about the difference issues in the other economies. In their finding they observed that the leverage ratio in their country is very low as compare to other developed country (G7) it is due to the underdevelopment of bond market in china and also due to unwillingness of long term loan from banks too. But the result shows that most of large firms are rely on external financing. Study showed that the leverage is positive related tangibility, size, and volatility while negative to profitability, tax, non debt text shield, growth opportunity, and ownership structure & managerial shareholdings.

13

CHAPTER 03

DATA COLLECTION & METHODOLOGY

Chapter 3

DATA COLLECTION & METHODOLOGY

This section provide information about the data collection, sampling techniques, analysis procedure, time horizon, and about variables used in research and their justification in the assessment of empirical findings & this section also provide information about model specification.

3.1 DATA COLLECTION

For the research I utilize secondary statistics, taken from the SBP publication (i.e. www.sbp.com.pk ) Balance Sheet and Income Statement Analysis of Joint Stock Companies Listed on The KSE (2003-2008). These periodicals give useful information about the non financial firms listed on KSE. Other sources of data collection are Firms websites, like SECP websites, KSE websites, & www.ssrn.com , www.jstore.org www.scribd.com & www.brecorder.com

3.2 SAMPLING TECHNIQUES

There are twenty nine (29) cement firms are operating in Pakistan but i took those cement firms as sample which are listed on Karachi Stock Exchange (KSE) the number of listed cement firms on KSE are twenty one (21) out of which nineteen (19) are selected as a

14

sample, two firms namely Flying Cement Ltd and Thatta Cement Ltd are dropped from the study because these two firms are not fulfill the criteria under which am doing my research (the data of these two firms are not available)

CHAPTER 03

DATA COLLECTION & METHODOLOGY

3.3 STATISTICAL ANALYSES

1. Ms Excel 2. SPSS (Statistical Package for Social Sciences )

3.4 TIME HORIZON

This is time series and panel data but due to short availability of time i took the only six years financial data i.e. (2003 to 2008) each firm under study.

3.5 VARIABLES
The variables which are used during the research one dependant variable that is total debt by total assets for proxy of leverage and independent variables are to be size of the firm, growth of the firm, assets tangibility, profitability of the firm and NDTS.

3.6 VARIABLES JUSTIFICATION BY THE HELP OF EMPIRICAL FINDINGS

3.6.1 LEVERAGE (LEV)

15

Leverage means the level of debt used to finance business (corporation) assets. The firms leverage level is defined as that up to how much extent the firm financed it by debt. If any firm financed at high level by debt then it said to be highly leveraged and in case of low level is vise versa. The leverage level is mainly depending upon optimum capital structure decision that set the intensity of cost minimal. In my finding i took the leverage as dependent variable because there are different factors which affect the leverage at different level (magnitude). Different researcher used different method to determine the debt level like (Rajaan & Zingales 1995) they used in there finding the total debt as scale CHAPTER 03 DATA COLLECTION & METHODOLOGY

of total debt plus equity as a substitute in favor of leverage. I took the book value of assets and book value of debt because it didnt change rapidly according to the perception of different investor (from studies) that the market value didnt sustain and the customary investor didnt take interest in market value. The main advantage of leverage is to put aside cash by tax debt shield benefits. As i discussed that by debt tax shield once it is issued it doesnt change its value further also by (Banerjee, S et al 2000). The other method of measuring of leverage is total assets divided by total debt or long term debt as a proxy for leverage as by (Shah and Khan 2007 & Shah and Hijazi 2004), in my research i use the total debt instead of only long term debt because in the Pakistan bonds market is still in developing stage and also there is no clear-cut admittance to the capital market too. In Pakistan the main source of financing are the commercial banks which didnt support the long term financing. I took both the short term financing & long term financing as a total debt. As by (Booth, et al 2001) In research they bring to a close that in developing countries Pakistan as well, that these countries exercise the total debt (Short term + long term debt) instead of only long term debt due to underdevelopment of capital stock market.

3.6.2 TANGIBILITY OF ASSETS (TGB)

The most using dependent variable in the capital structure is tangibility. As from different studies it is clear that the firm having more tangible assets it will go for more debt, mean if 16

a firm have more fixed assets then it should have high level of leverage value and less chance of bankruptcy as well. My first hypothesis suggests a non-negative correlation be present in assets tangibility & debt level. By (Jasir Ilyas) and i also take it as my first hypothesis. In Pakistan most of the firm take loan form commercial banks and these banks requires some thing to mortgage again the financing so if the firm has more fixed assets then they should have more level of leverage. In my finding I take the net depreciated fix assets divided by total assets.

CHAPTER 03

DATA COLLECTION & METHODOLOGY

3.6.3 SIZE (SIZE)

The another independent variable size which having two perception about the correlation of size and leverage the first is that if business having large size at that moment it should contain more fix assets and than the business should have high level of diversification too & it have low level of bankruptcy (diversified firm), so here must be optimistic positive correlation exists in size & debt level (Titman and Wessels 1988). On other side businesses having big dimension then according to (Rajan and Zingales 1995) they should go equity financing instead of debt financing, they find inverse correlation. My also expect the inverse correlation in between size of the firm & leverage. And in my finding I take the natural log of the gross sales.

3.6.4 GROWTH (GRTH)

If the firm is growing firm then it is unnecessary to go for debt financing. As POT state that growing firm be supposed to go first for retain earning but most of the time it is not adequate that the firm rely only on retain earning, if not then it should go for external financing this statement shows positive correlation exists among GRTH and debt level also by (Drobetz and Fix 2003) but other researcher find negative correlation among GRTH &

17

debt level like (Rajan and Zingales 1995 , Titman and Wessels 1988, Balakrishnan & Fox Jan 1993, Shah and Hijazi 2004 and Shah and Khan 2007) according to them if the firm is growing firm then it face higher cost of financing then other firms so the growing firm use less level of debt financing. In my finding I presume a negative correlation in-between growth & leverage. And the growth is measure as by taking the differences of current year sales and last year sales as numerator and the last year sales as denominator.

CHAPTER 03

DATA COLLECTION & METHODOLOGY

3.6.5 PROFITABILITY (PRF)

Profitability also looks like of growth. From studies it is clear that it always have negative relationship with leverage by findings of different researchers. POT state that firm must go initially to retain earning after that other type of financing because the bond holder and stockholder will demand of high return in contrast of high profitability so the managers should take a decision to go for internal generated funds instead of external financing and from it the manager are free to take apart in risky decision so the agency problem also decrease as compare to other source of financing. I also assume the inverse correlation in profitability & debt level. Also as a result of (Myers & Majluf 1984) to find the profitability I use to divide EBIT by total assets. The data didnt support to give the exact value of EBIT so i take the operating income instead of EBT, and calculated as Operating income divided by total assets.

3.6.6 NON DEBT TAX SHIELD (NDTS)

The Non debt tax shield which support the firms overall financial position and protect the firm from tax payment and also help them to save from debt financing. The non debt tax shields are depreciating of assets, research and development expenses as they are proxy for

18

tax provision. As the cost of debt (interest) are tax deductible so according to this it should have a positive relationship with leverage but on other side the non debt tax shield are tax deduct able so if the company having low level of tax then it should have low level of debt. I assumed in hypothesis that NDTS has inverse correlation to debt level. In my finding NDTS as annual depreciation divided by total assets as also by (Wald 1999).

CHAPTER 03

DATA COLLECTION & METHODOLOGY

Table 3.1
S.N o 1 Leverage

Variables & their Formulas

Formulas (calculation)

Variables

Total debt / total assets

(dependant) 2 3 4 Tangibility Size Growth Fix assets / total assets Natural Log of gross sales (Current year sales - last year sales) / last year sales 5 6 Profitability NDTS Operating profit / total assets Annual depreciation / total assets

Table 3.2
S.N o

Hypothesis Testing
Expected Relation

Variables

19

1 2 3 4 5

Tangibility Size Growth Profitability NDTS

Positive Relation with leverage Negative Relation with leverage Negative Relation with leverage Negative Relation with leverage Negative Relation with leverage

CHAPTER 03

DATA COLLECTION & METHODOLOGY

3.7 MODEL SPECIFICATION (METHODOLOGY)

In my research I used the dependent variable as leverage which is explained by different explanatory variables namely tangibility, size, growth, profitability and non debt tax shield in research i used the regression analysis on panel data. The General Composition of my model is:

Y it = i + it + it Y= dependent variable = constant = co-efficient of independent variables

i = 1 to 19 (firms) t = 2003-2008 (6 year)

= error term (which is not explained by explanatory variables)

The precise form of the model as follows

LEVit = + 1TGB it + 2SIZE it + 3GRTH it + 4PRF it + 5NDTS it + it LEV = leverage

20

= Constant (are different coefficients of independent variables)

1 to 5

TGB = tangibility SIZE = size GRTH = growth PRF = profitability NDTS = non debt tax shield
CHAPTER 03 DATA COLLECTION & METHODOLOGY

= error term
For the further analysis i also used the descriptive analysis (minimum value, maximum value, mean, median and Std. deviation) and for quantitative analysis i used the regression model and correlation model (Pearson) to find the relationships among these variables (multicollinearity). Minimum value shows the small statistics in data. Maximum value shows the large statistics in data. Mean shows the average value. Median shows the central value statistics. Formula for mean = xi

/n

Where xi represent summation of all the observation and n represents number of observation Standard deviation shows the deviation of the value from the mean position. Formula for standard deviation

21

CHAPTER 04

DATA ANALYSIS & RESULTS

Chapter 4

DATA ANALYSIS & RESULTS

This is the most important section of my research because on the basis of this section I will take the decision that which factor affects the dependent variable at which magnitude. Because this section shows the different analysis like descriptive analysis and quantitative analysis for descriptive analysis i use to find the minimum, maximum median and average values and Std. Deviation (which shows the deviation of the value from its original position). For quantitative analysis i used to find the different correlations analysis among explanatory variables and their impact on each others and on dependent variable as well. For all of the process i used the linear regression.

4.1 DESCRIPTIVE STATISTICS

The following table describes the summary of the dependent variable and all independent variables which are under study. It includes all the statistics like minimum values, maximum values, average mean values, median values and standard deviation

22

In the following table the minimum value of leverage is 0.212 & maximum value 2.869, Md statistics 0.5995 and average value is 0.63328 and the Std. deviation value is 37% which shows that the leverage value can deviate from its mean approximately 37%. In the tangibility the minimum statistics 0.042 & maximum statistics 0.984 while Md statistics 0.757 and average value is 0.71405 and the Std. deviation value is 18.11% which shows that the leverage value can deviate from its mean approximately 18.11%. In the size the minimum statistics 0.00 & maximum Statistics 9.944 while Md statistics 7.7795 and average value is 7.3491 and the Std. deviation value is 2.18 which shows that the leverage value can deviate from its mean approximately 2.18 CHAPTER 04 DATA ANALYSIS & RESULTS

In the growth the minimum statistics -1.00 & maximum Statistics 3.773 while the Md statistics 0.123 and average value is 0.1617 and the Std. deviation value is 48.25% which shows that the leverage value can deviate from its mean approximately 48.25%. In the profit the minimum statistics-0.234 & maximum statistics 0.439 while Md Statistics 0.045 and average value is 0.06576 and the Std. deviation value is 12.13% which shows that the leverage value can deviate from its mean approximately 12.13%. In the non debt tax shield the minimum statistics 0.0003 & maximum statistics 0.101 while Md statistics 0.033 and average value is 0.03377 and the Std. deviation value is 1.85% which shows that the leverage value can deviate from its mean approximately 1.85 %.

Table 4.1
Variable s Leverag e Tangibil ity Size

Descriptive Statistics
Minimu m 0.212 Maximu m 2.869 Median Std. Deviation 0.5995 0.3689932 13 0.042 0.984 0.757 0.1811499 57 0 9.944
23

A.Mean

0.63328

0.71405

7.7795 2.1841798

7.34941

88 Growth -1 3.773 0.123 0.482460 22 Profit -0.234 0.439 0.045 0.1212611 97 NDTS 0.00003 0.101 0.033 0.018490 118 0.03377 0.06576 0.1617

CHAPTER 04

DATA ANALYSIS & RESULTS

4.2 QUANTITATIVE ANALYSIS Table 4.2 Pearson Correlation & 2 Tailed Significant Levels

24

Leverag e Leverage Pearson Correlation Sig. (2-tailed) Tangibility Pearson Correlation Sig. (2-tailed) Size Pearson Correlation Sig. (2-tailed) Growth Pearson Correlation Sig. (2-tailed) Profitabilit y Pearson Correlation Sig. (2-tailed) NDTS Pearson Correlation Sig. (2-tailed) .038 .000 .195* .486 -.336** .000 -.066 .303 -.479** -.097 1

Tangibili ty -.097

Size

Growth

Profitabili ty

Non debt tax shield .195*

-.479**

-.066

-.336**

.303 1

.000 -.162

.486 -.056

.000 -.224*

.038 -.178

.086 -.162 1

.553 .258**

.017 .308**

.059 .101

.086 -.056 .258**

.006 1

.001 .185*

.283 .000

.553 -.224*

.006 .308** .185*

.049 1

.999 .019

.017 -.178

.001 .101

.049 .000 .019

.845 1

.059

.283

.999

.845

Number of observation are 114 **Correlation is significant at the 0.01 level (2-tailed tests 99% confidence interval) *Correlation is significant at the 0.05 level (2-tailed tests 95% confidence interval) In the quantitative analysis i used the Pearson correlation analysis. In the above table i want to investigate the multicollinearity (when two independent variables affect the dependent variable at same level) problem in among individual variables, form the study CHAPTER 04 DATA ANALYSIS & RESULTS

25

it is clear that if the correlation between the variables become greater then 80% then there must be the multicollinearity problem exists. But from the research i noticed that in all the observations values is less then 80% correlated, so at this time no involvedness of multicollinearity exsits in all factors. If the value shows the positive sighned value then there must be the same level of association between variables, mean if one varable increases the other variable will also increases & if one decreases the other variable will also decreases. On other hand if it shows the negative sighned value then there must be a diverse association exsit inbtween the variables, mean if one variable increase the other variable will decrease. In the above table leverage is negatively associated with tangibility, size, growth, and profitability its mean if we increase the level of tangibility, size, growth, and profitability then the value of levearge will decreases, and only one variable NDTS has same correlation. Association in between independent variables shows the upto how much extent it vary from each other. The relationship between the tangibility and size is (-16.2%) with p value of 0.086 which shows the negative relationship between these varaibles that if increases one variable the other variable will decreases. The relationship between tangibility and growth is (-5.6%) with p value 0.553 which shows also the negative raationship between the variables mean by increasing one the other variable will decrease. The relationship between tangibility and profitability is also shows negative relationship by the value of (-22.4%) and p value of 0.017. The relationship between the tangibility & NDTS are negative because its value is(-17.8%) with p value 0.059. The next relationship i observed between size and gowth which is positive (25.8%) with p value of 0.006. The relationship between size and profitablity is also positive (30.8%) with significant p value of 0.001 in last the relationship between size and nondebt tax shield is also positive (10.1%) with p value of 0.283. The relationship between growth and profitability is positive (18.5%) with p value of 0.049. And the associationship CHAPTER 04 DATA ANALYSIS & RESULTS

26

between growth and non debt tax shield is positive (0.000) with p value of 0.999 and in the last the assciation between NDTS & profitability is positive(1.9%) according to the Spearmen relationship and p value accroding two tailed test is 0.845.

4.3 REGRESSION ANALYSIS

In my research I used the linear regression model on pannel data for the year of 2003 to 2008 of ninteen (19) firms in order to see the corelation of one variable with other variable (leverage as dependent variable). All the process are done through MS Excel and SPSS.

CHAPTER 04

DATA ANALYSIS & RESULTS

Table 4.3

Model Summary
27

Adjuste Mod el R R Square dR Square

Std. Error of the estimate R Square

Change Statistics F Chang e 12.55 6 5 10 8 df 1 Df 2 Sig. F Chang e 0.000

Durbin Watso n 1.750

Change 1 0.60 6 0.368 0.338 0.300149 71 0.368

a. Predictors: (Constant), Non debt tax shield, Growth, Profitability, Tangibility, Size b. Dependent variable: Leverage In the table R also known as coefficient of variation which have the value of 0.606 or 60.6%. which shows the degree of association among variables, its value is always laying in between (0 & 1.00) in the above table R shows that the variable are 60.6% associate with each other. The other coefficient is said to be coefficient of determinaton R-Square (R2) which have the value of 0.368 or 36.8% mean that this much percentage change occure in dependent variable due cahnage in independent varaible (independent variables bring about 36.8% change in dependent variable) it value is always laying in between (-1 & +1). This result shows that in Pakistan the debt level of Cement Sector is not much vary form this over all vriation in independent variables. The adjusted R2 means that when we increase the number of independent variables the value of R2 become insignificant so then we take the value of Adjusted R2 so it gives a significant value, form the above table i can say that the total variation ocure in dependent variable is 33.8% due change in independent variables, and the remaining change 66.2% ocure from other factors other then taken independent

CHAPTER 04

DATA ANALYSIS & RESULTS

variables. In the last coulm the durbin Watson test give value about 1.750 which is also in the range.

28

Table 4.4
Model

ANOVA
Sum of Squares Regressi 5.656 5 df Mean Square 1.131 12.55 6 0.000 F Sig.

on Residual 9.730 Total 15.386 108 0.090 113 ***

a. Predictors: (Constant), Non debt tax shield, Growth, Profitability, Tangibility, Size b. Dependent variable: Leverage The above table ANOVA also known as Analysis of Variances which indicate about the significance of the whole model, either is it or not significant. Analysis shows that p statistics is less then 10% (p = 0.000) the F value (F> 4 ) which is in the model is 12.556 (1.131 / 0.090) which is also significant. So it shows the significance of the whole model.

CHAPTER 04

DATA ANALYSIS & RESULTS

Table 4.5

Coefficients
Un-standardized coefficients Standardized Coefficients

29

Model 1 (constant) Tangibility Size Growth Profitability NDTS

B 1.393 0.382 -0.081 0.071 -0.767 4.288

Std. Error 0.175 0.163 0.014 0.061 0.251 1.558

Beta

T 7.949

Sig. 0.000 0.021 0.000 0.244 0.003 0.007

0.187 -0.478 0.093 -0.252 0.215

2.341 -5.749 1.172 -3.058 2.752

a. Dependent Variable: Leverage The above table shows the un-standardized coefficient which shall be considerable. Where

= 1.393 which will be constant in overall process. The overall model is good fit and
significant because the std. error value 0.175 is also very low and the t value also greater then four and in the last column the p statistics which is 0.000 is the most considerable statistics. The coefficient of tangibility means that one unit increase in tangibility will bring about 0.382 much increase in leverage, holding other variables constant, and one unit increase in size will bring about -0.081 much decrease in leverage and the leverage will increase about 0.071 if we increase one unit in growth, also the negative change will occur in leverage about -0.767 due to increase in one unit in CHAPTER 04 DATA ANALYSIS & RESULTS

profitability. In the last the non debt tax shield will bring about 4.288 much change in leverage.

4.4 RESULTS & TESTING HYPOTHESIS ON THE BASES OF ANALYSIS

30

4.4.1 TANGIBILITY
Analysis suggest that the relation contain by TGB & debt level is identical because if we increase one unit of tangibility it will bring abut 0.081 much change in leverage and also its std. error value is less and p value suggest that 0.021 which is less then 10% so it is statistically considerable and t statistics is 2.341 mean that we reject the null hypothesis and accept the alternative hypothesis which state positive bond exists among TGB & debt level. This shows that TGB be the most predictable indicator of leverage. This means that in Pakistan most of the creditors firms are willing to give the loan to that firms which having high level of assets tangibility due to the default problems. My findings are also having resemblance with (Shah and Khan 2007) as they done their research on non financial firms. The results also give the similar results with empirical research as done by (Titman Wessels 1988, Haris and Raviv 1991 & Rajan and Zingles 1995) the other researcher find a negative bond among TGB and debt level as by (Boot et al 2001)

4.4.2 SIZE OF THE FIRM

This is the most essential factors as well to find the link between the firm size and leverage. The above table shows that in cement sector the size having negative relation with leverage because its p value also give the most significant value of 0.000 and also satisfy the t test having the value of -5.749 which is less then -2.00 and also having the very low level of std. error 0.014. My finding consent with some empirical findings as by CHAPTER 04 DATA ANALYSIS & RESULTS

(Rajan &. Zingles 1995) they consent that there is less asymmetry information exists and the firm will go for IPO, also consent with POT when the business size enlarge they will go for retain earning and then willing to take the short term financing instead of long term financing and also consent with (Farooqi-Lind & Taylor and Lowe 1995) .while (Mazhar.A & Nasir. 2006, Shah and Hijazi 2004 and Abor & Biekpe 2005) find positive relation between size and leverage. As form the analysis i reject the null hypothesis and take

31

alternative hypothesis & concluded the inverse association that in Pakistan most of the cement firms as their size increase they will go initial public offering (IPO).

4.4.3 GROWTH OF THE FIRM

As my results shows the positive relation with leverage with the value of 0.071 but not statistically significant because it gives the insignificant value of p 0.224 which is insignificant at 10% and also give higher error rate of 0.061 ant t value of 1.172 which is less then 2.00 so we agree with the intention of positive interrelationship exists with in growth & leverage then according to my findings the growing firms retain earning is not sufficient so they should go for short term financing or if capable then they should go for long term financing on other hand we also know that in Pakistan mostly the firms didnt go for external financing because of high interest rates and also due to religious point of view, but my results is not statistical significant so it cloud be the problem of data collection that I have taken or other else . Some of the researcher finds positive relation of growth with leverage too like, (Drobetz and Fix 2003).

CHAPTER 04

DATA ANALYSIS & RESULTS

4.4.4 PROFITABILITY OF THE FIRM

It is the most significant factor the affect the leverage at different level. In my findings i observed a negative relationship between profitability and leverage. The p value 0.003 which most significant and also having low level of std. error 0.251 and the Un-

32

standardized coefficient -0.767 and t value of -3.058 which indicate that that I rebuff the supposition & accept that negative correlation exists in profitability & leverage. Which also having resemblance with pecking order theory that due not full information or high level of financing costing the firms will go toward retain earning. The result is also comparable with other empirical finders like (Rajan, R., and L.Zingales 1995, Shah and Hijazi 2004, Farooqi-Lind, Shah and Khan 2007, and Abor and Biekpe 2005).

4.4.5 NON DEBT TAX SHIELD (NDTS)

I find the non-negative correlation in debt level & NDTS thus by increasing the NDTS level the debt level will also increase but the theory suggest that if we increase the NDTS then it helps in tax provision. So there must be negative relationship between non debt tax shield and leverage, but our Un-standardized coefficient give the value 4.228 and also having the low std. error of 1.558 and the t and p values respectively 2.752 and 0.007 so it is significant and i rebuff my hypothesis and recognize the positive correlation in debt level & NDTS.

CHAPTER 04

DATA ANALYSIS & RESULTS

Table 4.6
S.N Variables o 1 Tangibility

Hypothesis Testing & their Results Summary

Expected Relation Resultant

Positive

Relation

with Positive

33

leverage 2 Size Negative leverage 3 Growth Negative leverage 4 Profitability Negative leverage 5
Non shield debt tax

Relation

with Negative

Relation

with Positive (insignificant)

Relation

with Negative

Negative Relation with Positive leverage

CHAPTER 05

CONCLUSION

34

Chapter 5

CONCLUSION
This section provide the whole story about the results that which independent variable affect the dependent variable at which level and then judge it against with pervious empirical findings and conclude own findings.

5.1 CONCLUSION
The main theme of my paper is to find the determinants of the capital structure of Pakistan Cement Industry that up to how much extent different factors that can affect the optimal capital structure decision. The controversy remain as before due to inconsistent finding of different researcher, it could be also due to data unavailability or time factor as well, which include different issues like that different researcher done their research at different times and at dissimilar regions as well. My finding also not fully consistent with other researchers as they done their research in this arena but it is consistent with some one (researcher) as well. I took the ratio of total debt and total assets for proxy of leverage as dependent variable and find their variability by the intervening variables namely tangibility, size, growth, profitability and non debt tax shield as independent variables. The data provides full information about non financial firms operating in Pakistan as I done my research on Cement Industry so I took the nineteen (19) cement firms as a sample for the research. I observed that tangibility is most consistent factor that affects the leverage at different level. I find that tangibility is positive related to the leverage and also statistically significant also find by (Shah and Khan 2007). So from the finding i conclude that in Pakistan most of the firms having highest fix assets those have high leverage ratio CHAPTER 05 CONCLUSION

35

because in Pakistan most of the firms rely only on short term financing (the capital market is still in developing stage) (Booth, et al 2001), so they place it (tangible assets) with financial institutions as a guarantee to avoid the bankruptcy cost problems. While (Shah and Hijazi 2004), find it inconsistent. The second variable sizes i find the negative relationship of it with leverage that if the firm size increases then it debt ratio become decreases also by (Rajan and Zingles 1995), so concluded that in Pakistan most of the large cement firms having less leverage level. As i measure size by taking the natural log of gross sales, so when the sales increases so the creditor will demand of high returns so the firm will automatically switch toward retain earning with contrast of external financing. Yes it is also clear that most of large firm having large amount of tangible assets and diversified too but so they will switch towards debt financing but due to demand of high return they will switch towards internal financing instead of external financing. Growth is next factor that affect the leverage positively in my findings but the result is not statistical significant so i can say that there is positive relationship exist but not surely due to inconsistency of findings. I measured the growth as a current year sales minus prior year sales whole divided by prior year sales. So from this result I concluded that if the firm growth increases the firms leverage level will decreases in Pakistan cement industry but the finding is statistically insignificant. Profitability is the most trustworthy variable that in most of the researcher finds negative relationship with leverage, in my findings also there is negative relationship exists between leverage and profitability, also by (Rajan, R.,andL.Zingales (1995), Shah and Hijazi 2004 , Farooqi-Lind , Shah and Khan 2007 , and Abor and Biekpe 2005). And also concur with pecking order theory that if the firms become profitable then the asymmetry information takes place in between managers & stockholders then most of the firm try to sustain on retain earning instead of external financing, so in Pakistan most of CHAPTER 05 CONCLUSION

36

the Cement firms will go for Initial Public Offerings (IPO) next for debt financing and lastly for external equity financings. The last but not the least factor which affect the leverage also at different level is NDTS, as firms non debt tax shield level increase then the leverage decreases. But in my findings I find the non-negative correlation in NDTS & debt level. The positive relationship could also be due to the data which I have taken because most of the researcher that find out the negative relation they took the large number of panel data so it could be the problem of data that I have taken in my research.

5.2 FUTURE RESEARCH PROSPECTS

This research paper adds value to the prior work done on this arena and specifically to the non financial firms by examining of different theories and by some empirical results of capital structure in Cement Industry listed firms on KSE. I recommend different variables that could help in future for determining of capital structure like capital budgeting decision, dividend policy, (basically due to unavailability of data and shortage of time I couldnt do work on above variables) but I hope in future some one will do it for future prospective, and will define the above variables that which variable will effect the firms leverage at which magnitude.

37