CHAPTER 4: RESULTS

4.1 INTRODUCTION:
In this chapter, the main focus is on the results based on the quantitative research being done on non-
financial firms of Pakistan. The purpose of this study was to know what the determinants of capital
structure are and how a firm can find out a best possible financial structure. For the findings Secondary
data has been collected which made it easier to identify the company’s financial position as well as the
Optimal Capital Structure. Compilation of 12 years data for three different sectors of Pakistan have been
done that is Textile sector, Fuel and energy and Sugar sector from each sector three non-financial firms
were selected. Analysis of company’s financial position has been done on the bases of three variables
profitability, Size and Leverage. Research technique used for analyzing data was Dynamic Panel
Regression (GMM Method). Capital structure focuses on solving issues for the firms related to funding
and getting funds from different sources.

Firms want optimal financial structure that will help them to maximize their profit and solve the
problem of high leverage that deters investors to invest in the firm that blocks the main source of funds
for an organization. Walter’s Model & Gordon’s Model states that dividend policies affect the worth of
the firm. The main confusion is for managers and firms is to find out the optimal financial structure which
will affect the firm in both short-term and long-term performance. Capital structure plays an important
role in the success of the firm and managers, without it the firm cannot stay long in the market. The firms
with high debt ratio are more likely to be bankrupt because the more debt coming in, it makes difficult for
the firm to repay and in last creditors take over the firm. Capital structure will not only help the firms to
maximize their revenue but will help them to understand, what type of funding does the firm requires
which will help the firms to stay in the market.

There are so many theories which focus on the capital structure are (Modigliani and Miller 1958)
theory, Trade off theory, Pecking order, Market timing theory. Optimal mix of capital structure not only
maximize the value of the firm but it also helps the firms to retain the market share as well as it helps to
attracts the investors which helps to minimize the cost of capital (Barbuta, 2009). This study revolves
around the issue of funding for non-financial firms. The major problem is for managers to find out the
optimal financial mix for the firm so that the firm can strive to success.
4.2 Descriptive Statistics:
This section hashes out the implications of empirical findings and poses the estimation results. The
table below presents the summary of statistics of dependent and explanatory variables. The result
determines the assets of the firms in Pakistan are either financed by the debt or internal funding.

4.3 Research Technique:

The research technique used in Chapter 3 was Linear Regression. Linear regression is statistical
tool including one or extra independent variable, that anticipates the worth of dependent variable. Linear
regression is a very basic technique. It is exceptionally simple and natural to utilize and get it. Moreover,
it works in a large portion of the cases. Notwithstanding when it doesn't fit the information precisely, we
can utilize it to discover the idea of the connection between the two factors.

The model used for this study is given below,

Model # 1: L = β0 + β1 (P) + β2 (L) + β3 (S) + εit
Where, T = Tangibility refers to the tangible assets of the firm.
P = Profitability is used to determine company’s profit in relation to the size of the firm.
εit = The Error Term

Model # 2: L = β0 + β1 (INF) + β2 (CPI) + β3 (SI) + εit Where,

INF = Inflation refers to increase in the general price level.
CPI = Consumer Price Index refers to the variation in different goods.
SI = Stock Index refers to the tool used by financial analyst to know the current situation of the market.
εit = The Error Term
4.4 Results:

This figure shows the result of data collected for the study. Total of 5 variables are studied in this
result where as leverage is a dependent variable, size and profitability is independent variable, and
inflation and stock index are country level variable. Leverage is having a diverse figure as compared to
profitability and size. The results showed that the level of significance was less than 5% (Sig ≤ 0.05),
which proves that size, profitability and the leverage remained significantly and positively related to
capital structure.

4.4 Summary:
Quantitative research method is used from the two types of method. The data collection method
will be secondary data as it allows us to access a lot of firm and work on their working capital structure.
The data collection source will be financial firms and stock exchange. The data collection is an
important source of research. The research method used and the data collected is very important part of
research. Secondary data will be collected that will make it easy to identify the company’s financial
position as well as the Optimal Capital Structure. The data will be collected from company’s website,
annual report, and other publish material. Financial firms, banking sectors, multinational company’s data
are all in the nature of secondary data this is the reason why researchers take into account secondary
data. The sources of secondary data collection are state bank of Pakistan, federal bureau, website annual
report and other authentic material. The data collected will be analyzed to find out the relation between
the dependent and independent variable.