Impact of Capital Structure on the Performance of Textilesector in Pakistan: Examining the Moderating Effect of Liquidity

Abstract

Purpose: The basic aim of this study is to investigate how capital structure influences the performance of firms from textile sector listed at Pakistan Stock Exchange, taking liquidity of the firms as a moderator.
 Methodology: Data of 30 listed textile firms is taken from their financial statementsfor a period of ten years from 2007 to 2016.Analysis has been conducted using the Ordinary least square (OLS) regression. Two measures of capital structure (debt ratio and debt-to-equity ratio) have been used to find out its impact on three performance measures (return on assets, return on equity, and earnings per share).
 Findings: The variable, total debt ratio does not have any significant effect on all the three firm performance measures (return on asset, return on equity and earnings per share). Debt-to-equity ratio variable also does not have a significant impact on two firm performance measures (ROA and ROE). It however has a significant, negative impact on EPS. In case of liquidity as a moderator, it is found that liquidity acts as the significant moderator between the debt ratio and return on assets whereas liquidity factor is significant in case of relation between debt –to-equity variable and two performance variables return on assets and earnings per share..
 Practical implications: Practically this study is important from managerial perspective as the appropriate decision for choosing a level of capital structure vis-à-vis total assets and total equity is essential for the better performance of the firms.

Untitled

“…Capital structure (CS) of firms contains debt and equity which proportion varies from sector to sector. However, mixture of debt and equity (Akhtar et al, 2019) is considered as optimal CS (Kanwal et al, 2017). According to pecking order theory, internal financing (retained earnings) is preferred over external financing and debt is given preference over equity when external financing is needed (Zaheer et al, 2011).…”

“…According to pecking order theory, internal financing (retained earnings) is preferred over external financing and debt is given preference over equity when external financing is needed (Zaheer et al, 2011). Thus, to decide percentage of debt and equity is considered as crucial decision which has strong influence over firms' financial performance (FP) ( Akhtar et al, 2019) As per pecking order theory, debt is preferred because it provides tax shield (Akhtar et al, 2019) as interest on debt is subtracted before tax calculation. However, excessively relaying on debt can create troublesome for firms as it can lead to bankruptcy (Basit & Hassan, 2017).…”

“…Excessively relying on equity financing can create liquidity issues in firms (Basit & Hassan, 2017). Therefore, choice of optimal CS is crucial because inappropriate mixture of debt and equity have negative effect on FP (Akhtar et al, 2019). Thus, financial managers should carefully take decisions related to optimal CS as it can lead to maximizing shareholders' wealth (Abbas et al, 2013).…”

“…Review of extant literature reveals that majority studies conducted to study role of CS on FP are found in developed economies (Abdullah & Tursoy, 2019;Abeywardhana, 2016;Avcı, 2016;Berger & di Patti, 2006;Detthamrong et al, 2017;Margaritis & Psillaki, 2010;Salim & Yadav, 2012;Saputra et al, 2015). Limited empirical evidences are observed in developing economies (Abbas et al, 2013;Akhtar et al, 2019;Basit & Hassan, 2017;Fosu, 2013;Hossain et al, 2019;Kanwal et al, 2017;Nawaz et al, 2011).…”

“…H. Nguyen & Nguyen, 2020a;Pandey & Sahu, 2017). However, some studies have concentrated on a single sector e.g., Information technology (Hossain et al, 2019), textile (Abbas et al, 2013;Akhtar et al, 2019;Ahmed & Siddiqui, 2019;Nawaz et al, 2011;Sachdeva, 2019;Sattar, 2020), engineering (Khan, 2012), sugar (Saeed & Badar, 2013). The findings of studies reveal negative influence of debt financing on firms' FP (Kanwal et al, 2017;Zaheer et al, 2011).…”