Capital Structure and Financial Performance: Evidence from Pakistan

Ali, Syed Babar and Umyani, Muhammad Mehdi (2021): Capital Structure and Financial Performance: Evidence from Pakistan.

Abstract

The research is done with the purpose of increasing knowledge about the importance of working capital management. The research investigates the impact of working capital management on the profitability of the firms along with the impact of the same on the fixed capital investment of the firm. The research also finds out the interrelationship of fixed capital investment and profitability because the ultimate goal of the firms is to achieve maximum profitability at the lowest level of risk. The research has thoroughly examined the impact of variables involved through ratio analysis and tools like regression and correlation. The data was gathered from Karachi Stock Exchange. The data gathering was archival and panel data was used as a method to extract the needed information. The 20 companies are selected from KSE-30 index because they were considered the best-performing stocks in the market. The remaining 10 companies fall in the Banking sector which has a totally different perspective of debt and equity situation, thus, commercial banks are eliminated from the KSE-30 companies in this research. The results of the study show that working capital management does not affect the profitability of the firms in isolation, but there is a slight impact of managing the current assets and current liabilities. These should be accompanied by other variables as well to ensure profitability. The fixed capital investment has an extremely low, in fact, negligible impact on profitability. The effect of working capital management varies among industries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital structure; financial performance
• Subjects: G - Financial Economics > G0 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

1. Addae, A. A., & Nyarko-Baasi, M. (2013). Working Capital Management and Profitability: An empirical Investigation in an Emerging Market. Research Journal of Finance and Accounting, 4(15), 143-152.

2. Easterling, S., (2003), Marx's theory of economic crisis. International Socialist Review Issue 32. Retrieved From: http://www.isreview.org/issues/32/crisis_theory.shtml

3. Enqvist, J., (2013). The Impact of Working Capital Management on Firm Profitability in Different Business Cycles: Evidence from Finland.

4. Fazzari, S. M., & Petersen, B. C. (1993). Working capital and fixed investment: new evidence on financing constraints. The RAND Journal of Economics, 328-342.

5. Geroski, P., Machin, S., & Van Reenen, J. (1993). The profitability of innovating firms. The RAND Journal of Economics, 198-211.

6. Greg Filbeck, Thomas M. Krueger, (2005) "An Analysis of Working Capital Management Results Across Industries", American Journal of Business, Vol. 20 Iss: 2, pp.11 – 20

7. http://www.ksestocks.com/ListedCompanies/SortByName

8. Juan.P.G. And Martinez. P.S. (2007). ‘Effects of working capital management on SME profitability’, International journal of Managerial Finance, Vol 3 No 2, pp. 164-177

9. Kallberg, J. G., White, R. W., & Ziemba, W. T. (1982). Short term financial planning under uncertainty. Management Science, 28(6), 670-682.

10. KSE stock (2014), List of Companies listed at Karachi Stock Exchange (KSE). Available at:

11. Rafuse, M. E. 1996. “Working Capital Management: An Urgent Need to Refocus”, Journal of Management Decision, Vol. 34 No 2, pp. 59-63

12. Reddy Y.V and Patkar S.B., (2004), ‘Working Capital and Liquidity Management in Factoring: A Comparative Study of SBI and Can Bank Factors’. The Management Accountant May, Vol-39, No.-5, pp. 373-378.

13. Rehman and Nasr. (2007). ‘Working capital management and profitability – case of Pakistani firms, International review of business research papers’, Vol. 01 No.1 pp.279-300