1

Short Report

Prepared by:
Qasra Siddiqui

Submitted to:
Sir Sajid

M.Com Final
2015

Determinants
Of
Capital structure
decision
of
Textile industry
of
Pakistan

Table of content
1.
5
2.
6
3.
9
4.
12
5.
13
6.
13
7.
16
8.
17

Abstract
Introduction
Literature Review
Theoretical Framework
Hypothesis
Data Collection & Methodology
Findings
Conclusions & Recommendations

I firstly give my thanks to almighty ALLAH, whose blessings and support has
helped me greatly to complete my report properly on time.
Secondly I am deeply indebted to my lecturer MUHAMMAD SAJID (Course supervisor)
who provided many valuable suggestions and guidance and support have assisted me to complete
my research work in a proper manner.

ABSTRACT
Purpose: Purpose of this study is to evaluate the determinants of capital that
affect financing behavior of the firms of textile industry of Pakistan keep viewing
that the capital structure decision plays an important role in any firms financing
decision while financing their firms.

Methodology/ Sample: Tangibility of firms (i.e.: fixed assets

structure), size of firm, NDTS (Non debt tax shield), Growth of the firm & profitability
were used as independent variables while leverage was used as depended variable.
Researcher has taken a sample of top 10 firms from the list issued by KSE recently
from the textile industries of Pakistan. The has been taken for the period of 20062011. Correlated & Regression analyses has been used. F value was calculated to
test the fitness of overall model.

Findings:

Results of the study showed a negative relation of tangibility,

size of the firm & growth with leverage. However a positive relation was found for
NDTS & Profitability with leverage.

Practical Implications: The findings enhance the knowledge base

of determinants of optimal capital structure & are likely to help textile firms to help
the decision makers can better adjust themselves towards adopting & considering
proficient ways of managing capital structure of their firm.

DETERMINANTS OF CAPITAL
STRUCTURE DECISION OF TEXTILE
INDUSTRY OF PAKISTAN

1.

Introduction:

Pakistan Textile industry is one of the most vital sectors in the country GDP
contributions and it is the backbone of Pakistan economy. Researcher has
conducted a research last year in business research course about the decline
in textile production of Pakistan. Researcher studied many articles and
business news for that purpose and found the overall contribution of the
Textile industry is more than 65% and it provides 40% employment. Pakistan
is the 8th foremost exporter of textile products to international market.
Textile sector of Pakistan contributes a great role in the economy of Pakistan
by providing job opportunities and also to earn foreign trade. The main
competitor of Pakistan textile industry includes China, India, Bangladesh and
Turkey. As per the importance of this sector the capital structure of textile
industry is also very important for the economic growth of Pakistan.
Capital structure is the choice whether to go for Debt or equity or a mix of
them. Capital structure is the sum up of debt, equity and retained earnings.
The objective of the firms management is to enhance the value of the firm.
The shareholders can benefit from the fruits of Capital structure and they can
benefit more if a best debt-equity ratio is worked out. The value of firm is
equal to the summation of both debt and equity. The weighted cost of capital
can be minimized and the shareholders wealth maximized by the Capital
structure decision. The different firms follow different combination of debt
and equity which has provided origin to different capital structure theories.
Capital structure is very momentous for the firm mainly textile sector.
Because it has an impact on continuing firms profits, firms valuation and
capital budgeting decisions. Capital structure is disposed by many factors
like size, growth, profitability and specific industry. Textile industry is the
most important sector of Pakistan which contributes lion's share in countrys
exports. Economy of Pakistan has a great impact of performance of textile
sector. This sector of Pakistan mostly relies on bank loan.

1.1) Importance of capital structure:

A companys capital structure serves many key purposes. The basic purposes
are:
First and primary, different players have different claims on the business. The
debt holders have claimed to receive annual interest payments on regular
basis and the principle amount also. The equity holders have a claim to
receive a certain percentage in the firms future profit.
Secondly, while investing investors are quit interested to look at the
proportional weightage of different types of financing used by the firm. The
purpose of analyzing the capital structure is to know that how risky it is to
invest in a business.

1.2) Background:
In the opinion of management the cast of capital can handle efficiently with
the help of effective capital structure. The study has been made many times
for several years on this topic but it is still solvable issue. Modigliani-Millar
(1958) explained the theory of irrelevance. In this theory he gave the
primary theoretical frame work & his theory opened new doors for advance &
new research. With the help of this theory new theories were found such as
pecking order theory (POT) & static trade off theory (STT), signaling theory
and agency theory.
Shah & Hijazi (2004) studied first time about the capital structure with
respect to listed firms of KSE. This research provides new way to the
researchers. After that many studies were over there in different sectors of
Pakistan.
First study on Textile Sector of Pakistan was done by Akber, Ali & Tariq
(2009). They studied about the whole industry. By carrying this theory
Yaqoob & Gohar (2013) studied the textile composite sector of Pakistan taken
the industry specific variables to determine the capital structure of Textile
composite sector of Pakistan.

Many other studied were carried out to evaluate the optimal capital structure
with the help of premier theories. Different financier agreed with different
theories & follows that one. A study on Pakistan Textile sector made by
Aurangzeb & Anwar-ul-Haq (2012) by using total debts. However
Considerable work has been done to know the optimal capital structure
decision that is in influenced by many factors like profitability, size, age,
growth, non debt tax show that firms performance is surely influenced by
capital structure. In this study leverage is taken as dependent variable while
firms size, firms Profitability, Tangibility of assets, firms growth & Non tax
debt shield are taken as Independent variable. All variables taken with regard
of previous studies.

1.3) Research questions:

In this research we are going to find out the capital structure determinants
and their relations.
1.3.1) What is the relation between leverage and firms size?
1.3.2) What is the relation between leverage and tangibility of assets?
1.3.3) What is the relation between profitability and leverage of the firm?
1.3.4) Is growth of the firm affected by leverage?
1.3.5) Is there a negative relation between leverage and NTDS?

1.4) Objectives:
The prime purpose of this study is to know the factors that are significant
predicators of firms capital structure in Textile industry of Pakistan. Secondly
to know the impact of firm specific determinant on capital structure. In
addition we also want to analyze that how much our results support formal
capital structure theories. The basic purpose is analyze that the results
supports which one theory i-e, STT & POT

1.5) Literature Review:

The literature will be taken in this study by studying scholarly articles writer
by different researcher & the primary theories such as theory of irrelevance
(958), Static Trade off theory (1984), Pecking Order Theory, Signaling theory
(1977) & Agency theory.

1.6) Research Problem:

The main problem of this research paper is to find out the optimal capital
structure of a Textile Industry of Pakistan.

1.7) Methodology:
The main focus area in this study will be the Textile sector of Pakistan.
Researcher will do non profitability design research with the help of
convenient sampling. Regression Model will be used to find the relations of
different variables.

1.8) Hypothesis:

H1: Size of the firm is positively related to firms leverage.

H2: Firm having lower ratio of fixed assets will borrow less.
H3: Profitability and leverage are correlated with each other.
H4: There is a positive relationship between growth and leverage.
H5: There is a positive relationship between NTDS and leverage.

1.9) Significance:
This study will be purely made on Textile sector of Pakistan; It would be
helpful to know the factors of this industry that influence in the capital
structure decision making.

10

2. Literature review:
As mentioned before literature review will consist on the primary theories
and articles by different researcher. Here we are going to describe those
theories and literature of different researchers according to time series.
The capital structure of a company reflects company current position and
evaluates it with the help of past position of firm.
Theory of Irrelevance: It has been observed that a firms worth is sovereign of
the capital structure: stated by Miller and Modigliani (1958). In their opinion if a
firms value depends on capital structure, then arbitrage opportunities would be
on hand in perfect capital market. In addition, if investor and organization both
could have a loan of at same interest rate, investor could offset any capital
structure decision of the association. While many unfeasible statement are
described by this theory, but it gives the primary theoretical framework for new
& advance studies.
Static Trade off Theory: This approach on capital structure is well defined by
Myers (1984). The concept is divided into two theories by him. Static trade off
theory (STT) & Pecking order theory (POT).According to STT, a firm obeys a debt
to equity ratio and then performs accordingly. Return and cost of debt set the
ratio: It consists of taxes and monetary distress cost.

Pecking Order Theory (POT):

This theory explains that while creating the capital structure of an
organization follow a chain of monetary conclusion. In house financing (e.g.
R.E) is the most preferable method for an organization for financing their new
developments & plants. If out sides funds are needed then there are two
options for getting it, i.e. debt & equity financing to fulfill its need.
According to the Pecking Order Theory; fruitfully running organizations, dont
like to get loans & normally use in house recourses for their
needs/development. POT has significant effect on organizations Capital
structure, which prefers interest of equity holder rather than mutual interest
of equity & debt holders.
Myers & Majluf (1984) recommends that caused by repulsive problem of
selection most of the organizations feels uncomfortable or uncertain for

11

issuing the equity. In the opinion of Timton (2003) equity issuing

phenomenon have evenhanded cost of transaction. Because of its cost most
of the organizations feel hesitation.
In a nut shell Pecking Order Theory suggests that according to their present
working condition financial recourses will be understood & gives priority by
the organizations. i.e. First priority is being in house financing, when it
becomes inadequate then go for debt then issue of equity.

Signaling Theory: Ross (1977) gave the theory of signaling. In this theory
the sign of confidence for investors was supposed to be debts. Issuance of
debt by the organization taken as the indicator of that the organization was
looking onward after that for manages in cash flows.
The second subject of this theory was Equity under Pricing. This has been
discussed in Pecking Order Theory. If organizations issue the equity rather
than debt, to fulfill its need, it will be considered as a negative signal for the
financiers, because of its cost.
Agency Theory: Agency theory is another way of explaining the selection of
capital structure.
The approach of difference in managers & shareholders is recognized by
Jenson & Meckling in 1976. According to them where the agency cost is at
minimum that would be the most favorable capital structure for an
organization. This approach is alike with Myers (1997), he said that
organization will have least gearing ratio because of Partial or asymmetrical
knowledge & information. The manger whose stake was less than 100% in
the firm would use the free cash flows for the sake of his own benefit, which
he would use to boost the value of the organization. Recommended by the
Jenson (1986), by increasing the share of the manager this problem can be
resolved. So, the advantage of the company & can be achieved by the debt
financing. Followed theories provided the strong base to evaluate the factors
which control firms leverage or gearing.
Ignacio (2003) considered the Uruguayan Corporations. He studied that 40%
of firms has used own resources to finance their business. That shows the
high leverage using by most of firms. As much as leverage value was
concerned no witness was found to assure the positive relation of firm size &
tangibility of assets with leverage. These results supported the Pecking Order
Theory that showed inverse relation among profitability & outside funded

12

finally he accepted the negative relation of profitability & leverage just as

result of advance countries.
The financing pattern of developed economy is beige followed by Firms of
Pakistan the pattern is given by the trade off theory & Pecking order theory.
In their opinion leverage structure was not affected by the ownership. The
life blood of any organization is their working capital & it may be taken as the
most valuable or atypical function of the management. An enough amount of
working capital is compulsory required by every kind organization. (Sajid,
Raza, Musarrat & Mukhupadhyay. 2004)
Shah & Khan (2007) studied to find out the determinants of capital structure
listed in stock Exchange of Karachi. The date was taken for 8 years during
the period 1994-2002. 7 variables were taken by him. In his Conclusion he
evaluated that textile industries having greatest leverage ratio. The reason
behind this is that all the textile industries lying under the category of family
business & profit margin were understood by them. They want to minimize or
deny paying out the divided to all the investors. Overall profit was going to
decline for total years that eventually motivate the debt in their capital
structure.
A study Rafiq, Iqbal & Atiq (2008) suggested that capital structure can be
varied according to the industry nature and industry specification. They
found positive correlation between Tangibility & Leverage. It reflects with
Shah & Hijazi (2004) but oppose to Jenson & Mecking (1976) & Myers
(1977).They found positive correlation with growth, It is also opposite to Shah
& Hijazi (2004).These was being a negative correlation with profitability. This
suggested that successful firs in chemical sector of Pakistan have large debts
ratios. The explained that large firms in Pakistan have large debts and small
firms avoid borrowing generally. It showed that the size of the firm has
positive relation with leverages.

2.1) Dependent and independent variables:

Capital structure determinants have been studied many times by different
researchers we have taken the variables after studying the literature review
regarding Pakistan industrial sector. The main purpose of this study is to
analyze the determinants that effects capital structure decision making. With
the help of prior studies we have taken leverage as a dependent variable.
Moreover independent variables are also taken as prior studies such as: size
of the firm, profitability of the firm, tangibility of assets, firms growth, and
non debt shield. These variables are considered before this study by many

13

researchers like: Rajan and Zingles (1995), Shah and Hijazi (2005), Hijazi and
Tariq (2006), Fozia et al (2013), Noah Yasin (2014) followed to Meckling
(1976) and Myers (1977), Sabeel and Hanif (2011) etc.

Theoretical framework:

Tangibilit
y

14

HYPOTHESIS
H1: Size of the firm is positively related to firms leverage.
H2: Firm having lower ratio of fixed assets will borrow less.

Size

H3: Profitability and leverage are correlated with each other.

H4:Leverage
There is a positive relationship between growth and leverage.
NDTS
H5: There is a positive relationship between NTDS and leverage.
2.1.1) Measure of Leverage:

Growth

Prior studies recommend that the level of leverage depends upon the
definition of leverage. Measurement of based on both market and book
value. Both the methods have been used by many researchers
(Timtan &
Profitabili
wessel 1988, Rajan & Zingales 1995). The earlier measure dividing the book
tyon
value of debt by book value of debt plus market value of equity later
measure dividing the book value of debtby book value of debt plus book
value of equity. We are using the book value measure of leverage.

Leverage =

Total Debt
Total Assets

In the book value measure cash saving is the main benefit of leverage by the
debt tax shield. Because one debt issued the debt-tax shield is not effected
by market value (Banerjee, S. et at 2000). This is because of irrelevancy of
market value of debt.
Another reason of using the appropriate measure of leverage is to take total
liabilities or only Non current debt as a percentile of total assets. Although
premier capital structure theories considered long term debt as a proxy of
leverage. In Pakistan most of the firms are using short term financing
because of their average size of the firms which makes difficult to establish
capital market due to technical difficulties & cost (Shah & Hijazi 2004).
Commercial banks are the main source of debt in Pakistan, There banks
usually do not consider or encourage to provide long term loans. Corporate
bond market is yet limited history in Pakistan & is in the process
development. This is the reason of short term debts used by firm rather than
long term debts in Pakistan. Booth et al (1999) also analyzed in their
research that the use of long term debt is lesson than the short term debt.
This study was made on the developing countries including Pakistan.

15

2.1.2) Size:
The relation between the size & leverage has a conflict point of view by
different researchers. Trade off theory showed a positive relation of size &
leverage. On the other hand pecking order theory suggested a negative
relation between them. First, while deciding the level of leverage by large
firms the direct bankruptcy cost is not considered as an affective variable as
constitution fix these costs & compose a minor proportion of the total firms
value and also, larger firms being more diversified has small probability of
bankruptcy (Timtan & wessel 1988). Subsequently it may accept a direct
relation between size & leverage of a firm second, in contrast of first view,
Rajan and Zingales (1995) argued that there was less irregular information
about the larger firms. That reduced the probability of undervaluation of new
equity issue & this encourages the large firms to use more equity financing.
This proves a negative relation between size & leverage of the firm).
Following Rajan & zingales (1995), we accept that there is an inverse relation
between size and leverage of the firm. This research is using size as a
natural log of total assets.

Size = Ln (Total Assets)

2.1.3) Tangibility of Assets:
Trade off shoed a positive relation among tangibility of assets (i,e fixed
assets) & leverage. Miller (1977) & Myers and Majluf (1984) emphasized that
structure of a firms assets has an impact on its financial policies. A firm can
borrow at relatively lower rate of interest if it has large amount of fixed
assets. The reason behind is to providing the security of those assets to the
creditors. Having the lower rate of interest the firms expected to borrow
more while having large amount of fixed assets in contrast of those firm
whom have less fixed assets. Because their cost of borrowing would be
higher. Pecking order theory suggested a positive relation of fixed assets with
long term leverage & a negative relation with short term leverage.
Accordingly, we expect a positive relation of tangibility with leverage.

Tangibility =

Net Fixed Assets

Total Assets

16

2.1.4) Profitability:
Trade off theory showed a positive relationship between firms profitability
and leverage. It described that more profitable firms have higher income to
shield tax. This is the reason behind they borrow more debts. Whereas
pecking order theory showed an inverse relation between profitability &
leverage of a firm. This concept was developed by Myers & Majluf (1984).
They said that firms & investors both had asymmetric information in order to
firms performance. Anthonio (et, at, 2006), Sabeel and Hanif (2011) Taqoob
& Gohar (2013), Hijazi & Tariq (2006) and many others found a negative
relation between profitability & leverage. We are also expecting a negative
relation between both of them.

Profitability =

Net Profit after tax

Total Assets

2.1.5) Growth:
Empirically, there is much controversy about the relation between growth
rate and levelof leverage. According to Pecki8ng order theory, a firm firstly
uses its internally generated funds. But for growing firms it may not be
enough or sufficient for it. Then they will move towards the next option that
is debt financing which shows that growing firms will borrow more (Drobetz
and Fix, 2003). On the other hand, agency costs for growing firms are
expected to increase as these firms have more flexibility with regard to
future investments. The reason behind is that the debt holders fear that
these growing firms may go for more risky projects in future as they have
more choice of selection between risky and save investment opportunities.
With regard of this expected future risk, debt holders will impose higher cost
while lending to growing firms, therefore, facing higher cost of debt will
enforce to use less debt financing and more equity financing. Similarly,
Titman and Wessels (1988), Barclay et al. (1995) and Rajan and Zingales
(1995) all find an inverse relation between growth opportunities ang
leverage. After studying many research articles researcher have taken a
positive relation between growth rate and leverage. Different research
studies have used different measures of growth; like market to book value of
equity, research expenditure to total sales measure and annual percentage
increase in total assets (Titman and Wessels, 1988). Given the structure of
data researcher measure growth (GT) as a percentage increase in total
assets, as the data was taken from the State Bank of Pakistan publication

17

which does not contain information on annual stock prices and research
expenditure of the listed firms.

Growth =

Y2 Y1
Y1

100

2.1.6) Non-debt tax shield:

Non-debt tax shields (NDTS) include depreciation and investment tax credits.
De Angelo and Masulis (1980) said that non-debt tax shield can be used as a
substitute for the tax benefit of debt finances and a firm having large nondebt tax shield will have lower amount of debt. The empirical evidence on
use of proxy for NDTS is almost the same. For example, Bradley et al. (1984)
used the sum of annual depreciation and investment tax credits divided by
earnings before depreciation, interest and taxes to measure NDTS. They
found a positive relation between NDTS and leverage.
Wald (1999) used the ratio of depreciation to total assets and Chaplinksy and
Niehaus (1993) employed the ratio of depreciation expenses plus investment
tax credits to total assets to measure NDTS. Both found the leverage is
negatively correlated with NDTS. In this study, researcher uses annual
depreciation charges divided by total assets to calculate non-debt tax shield
(NDTS).

NDTS = Annual Depreciation

Total Assets

3.

Data Collection and

Methodology

To find the relationship between the dependent variable and independent

variables researcher has used the regression equation. In this study the
secondary data has been used for this purpose. All the data has been taken
from the balance sheet analysis of textile industries of Pakistan published by
State Bank of Pakistan (2006 - 2011). In this study researcher has used the
data of Leverage, Firm's Size, Tangibility of Assets, Growth of firm,

18

Profitability and NDTS (Non Debt Tax Shield) for the stated period. After
specifying the capital structure function in linear form it can be described as:

LG=0 +1(TG) + 2(SZ) + 3(GT) + 4(PF)

+ 5(NDTS) +
Where:

LG = Leverage
TG= Tangibility
SZ = Size
GT = Growth
PF = Profitability
NDTS = Non debt tax shield
= Error term

Table 1: Descriptive Statistics

Descriptive Statistics
N
DE
Tangibility
Size
NDTS
Growth
Profitability
Valid N (list
wise)

10
10
10
10
10
10
10

Minimum Maximum
-3.78
.43
5.43
.02
-.12
-.07

4.64
.70
7.63
.16
1.65
.08

Mean

Std. Deviation

1.4823
.5228
6.5963
.0502
.2756
.0267

2.17211
.08548
.62716
.03881
.50847
.04591

Table 1 is showing the descriptive statistics for the dependent and

independent variables. The mean value of 1.4823 has shown a high debt
ratio of the average industry. The standard deviation of 2.17211 which has
shown a high variation in the debt financing.

19

The average tangibility ratio for the whole industry is moderate as the mean
value is 0.5228. Which means industry has 52.28% tangible assets of their
total assets? the standard deviation showed little variation of 0.8548 or
8.548%
The size of the firm has a higher mean value of 6.5963 for the average
industry. As the size is natural log of total assets so it is justified for this
industry. The standard deviation is also high that is 62.716%. That showed a
high variation in size of the firm.

The

table.

Table 2: Regression Model Summary

Model Summary
Model

R Square

Adjusted R
Square

.750a

.563

.016

first table of
Std. Error of
the Estimate
2.15449

of the

Model Summary
This table provides
R2, adjusted R2,

the R,
and

interest is the

a. Predictors: (Constant), Profitability, Tangibility, Growth, Size,

NDTS

the standard error

estimate, which

can be used to determine how well a regression model fits the data:
The "R" column represents the value of R, the multiple correlation
coefficients. R can be considered to be one measure of the quality of the
prediction of the dependent variable; in this case, Leverage. A value of
0.750, in this example, indicates a good level of prediction. The "R Square"
column represents the R2 value (also called the coefficient of determination),
which is the proportion of variance in the dependent variable that can be
explained by the independent variables (technically, it is the proportion of
variation accounted for by the regression model above and beyond the mean
model). You can see from our value of 0.563 that our independent variables
explain 56.3% of the variability of our dependent variable, Leverage.
However, you also need to be able to interpret "Adjusted R Square" (adj. R2)
to accurately report your data.

20

Table 3: Statistical significance

ANOVAb
Model
1

Sum of
Squares

df

Mean Square

Regression

23.895

4.779

Residual

18.567

4.642

Total

42.463

F
1.030

Sig.
.503

a. Predictors: (Constant), Profitability, Tangibility, Growth, Size, NDTS

b. Dependent Variable: DE

The Fratio in
the
ANOVA
table (see
below)
has

tested whether the overall regression model is a good fit for the data. The
table has shown that the independent variables statistically have not
significantly predicted the dependent variable, F(4, 95) = 1.030, p < .0005
(i.e., the regression model is not a good fit of the data).
The general form of the equation to predict Leverage from tangibility, Size,
Growth, Profitability, is:

Predicted Leverage = 87.83 (24.571 x Tangibility) (0.729 x Size)

(4.868x Growth) + (19.745 x Profitability) + (75.873 NDTS)
This is obtained from the Coefficients table, as shown below:

Table 4: Coefficients

21
Coefficients

Unstandardized
Coefficients
B

Std.
Error

(Constant)

16.147

21.572

Tangibility

-24.571

14.646

Size

-.729

NDTS

95.0% Confidence
Interval for B
t

Sig.

Lower
Bound

.749

.496

-43.746

76.039

-.967

-1.678

.169

-65.235

16.093

2.490

-.211

-.293

.784

-7.642

6.184

75.873

63.788

1.355

1.189

.300

-101.230

252.975

Growth

-4.868

4.473

-1.140

-1.088

.338

-17.286

7.550

Profitability

19.745

31.059

.417

.636

.560

-66.489

105.979

Model
1

Standar
dized
Coeffic
ients
Beta

Upper
Bound

a. Dependent Variable: DE

Unstandardized coefficients indicate how much the dependent variable

varies with an independent variable when all other independent variables are
held constant.
Statistical significance of the independent variables
You can test for the statistical significance of each of the independent
variables. This tests whether the unstandardized (or standardized)
coefficients are equal to 0 (zero) in the population. If p< .05, you can
conclude that the coefficients are statistically significantly different to 0
(zero). The t-value and corresponding p-value are located in the "t" and
"Sig." columns, respectively, as highlighted below:
You can see from the "Sig." column that all independent variable
coefficients are statistically significantly different from 0 (zero). Although the
intercept, B0, is tested for statistical significance, this is rarely an important
or interesting finding.

4. Findings:
In table 4 coefficients showed the relation between the dependent &
independent variables as given:
The selected hypothesis with respect of tangibility of the firm was consistent
with the trade off theory. However the results has shown a negative relation
between tangibility and debt by the value of
1= -24.571. Thus the

22

negative coefficient rejects researchers earlier hypothesis of positive

relation between them. It is oppose to trade off theory of Jensen and
Meckling (1976).
The selected hypothesis with respect of size of the firm was consists with the
trade off theory that suggested a positive relation between size of the firm
and debt financing. However the result has shown a negative relation by the
value of 2 -0.729. The results do not confirm the prediction of pecking order
theory. The results are also consistent with the view of Rajan & Zingales
(1995). The researcher accepts the null hypothesis that there is a negative
relation between size and debt financing. The researcher rejects the stated
hypothesis that size and leverage are positively correlated.
According to the followed method Non debt tax shield is positively related
with debt financing so accepting the stated hypothesis & rejecting the null
hypothesis.
The selected hypothesis about growth opportunities of the firm was based on
the prediction of the pecking order theory. However the relation found
between them was negative by the value of 4 -4.868. This suggests that the
growing firms will borrow less. The negative coefficient confirms the
prediction of trade off theory thus rejecting the earlier hypothesis and
accepting the null hypothesis that growth and debt financing are negatively
correlated.
The selected hypothesis about profitability and debt financing was based on
trade-off theory which suggested a positive relation between them. It is in
opposed to pecking order theory. This study found a positive relation as
coefficient is positive by the value of 5 = 19.745. Thus accepting the earlier
hypothesis and rejecting the null hypothesis. That showed a negative relation
between profitability & debt financing.

5. Conclusion & Recommendation:

After evaluating the textile industry of Pakistan in this study, researcher
found that optional structure is not a science, So after evaluating the number
of factors, a firm establishes a target capital structure it believes is optional
or best for it, which is then used as a guide in future for raising funds.
The findings of the report showed that in textile sector of Pakistans most of
the firms use financing instead of equity financing. Main sources of entenal
financing available to the Pakistanifirms are commercial banks.
This study was contained the data of textile industry of Pakistan for the
period of 2006-2011. Correlation and regression technique is used to

23

evaluate the relationship between dependent variables (leverage) and

independent variables (Tangibility), Size, NDTS, Growth & Profitability). It is
concluded that all independent variables have significant impact on the level
of leverage. It is further concluded that tangibility of firm, size of the firm &
growth of the firm having negative relation with leverage. On the other hand
NDTS & profitability of the firm having positive relationship with leverage.
It is recommended that internally generated funds may not be enough or
sufficient for growing firms & debt financing may be only optional for further
growth. Tangibility is significantly related to leverage. Furthermore
recommends that Pakistans economic condition charges from time to time
do the factors that affect the capital structure in textile sector should be in
harmony with the prevailing economic condition of Pakistan. Outcomes of the
study can provide a benchmark to an individual textile firms to check its debt
equity financing ratio is in line with the whole textile industry or not.
Researcher suggest that more research should be conducted on the same
topic with different companies, sectors or sub sectors. And/or extending the
years of the sample size for further understanding of determinants of capital
structure decision.

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