This investment. The source contains debt financing which further

This
study focuses on the relationship of the capital structure with firm
performance and firm value of the listed firms in Pakistan stock exchange (PSX).
The capital structure is one of the most complicated issues in the corporate
finance. This concept is generally explained by the mixture of debt and equity
that make a total capital. The part of debt and equity is up to finance
managers, that’s what percentage they choose of debt and equity. The decision
of making capital structure is an important one as the performance and value of
any organization is based on this decision. So, full attention has to be given
on this while making the capital decision. In any organization, the overall
position, including all types of assets, liabilities are shown. The term
“capital structure” is a mixture of equity shares, preferred shares and long
term debts. A careful attention has to be made when making the capital structure.
With unplanned capital structure, companies fail in using funds in the correct
manner. It is important that the company should realize that by making a plan
of capital structure, it will maximize the use of funds and will be able to
adopt the changes easily.

Maximizing the firms
performance and value capital structure play crucial role. Capital structure is
one of the major sources to collect the fund which is used by firms in its
operations and capital investment. The source contains debt financing which
further include long-term debt finance and short term debt finance. Equity
financing include preferred stock and common stock which is sometime called as
equity financing. Many theories like, the agency theory, Information asymmetry
theory, Signaling theory and Trade off theory highlighted the relationship
between capital structure decisions with the firm performance. Agency problem
is most important of all that happens between shareholder and managers, and
that’s why management does not get motivation for their maximum efforts which
are required for personal gain and that is for their interest and that’s why
firm values goes down which are ultimately harm shareholder’s interest.
Therefore debt financing is used to control or restrict the interest of managers
regarding their personal gain. Debt financing reduces the free cash flow
regarding the manager’s personal interest and focuses them to work for interest
of shareholders. As per the asymmetric information theory manager of the firms
have more information than shareholders. The managers which do have polish
information provide positive information to shareholders and potential
shareholders for increase of its firm’s values. Signaling theory states that
manager use incentive and signals the market that how their company
differentiates from weaker one. Use of debt is important tool for above
mentioned signals. By involving of debt in capital structure indicates that
manager do have better expectation for future performance. While equity
indicates bad signals for the firms performance. For checking the impact of
capital structure on firm performance many studies have been conducted till
now. Debt financing and equity financing are main sources on which capital
structure bases. The source shows mixed and contrasting results regarding the
performance and value of firm. In un appreciating there is a positive relation
between debt financing and firm value. While debt financing which are from bank
reduces information irregularly problem and increase the investor interest in
firm. 

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The
connection between profitability and capital structure is the one that acquires
appreciable attention in the finance literature. The study that tells us the
effects of capital structure on profitability will help us to know the complications
in the performance and in capital structure. The new industrial firms have to
take their firm into most complexes and in the most competitive environment.
Therefore, these types of research findings will be useful in selecting the
capital structure to achieve its greatest level of firm’s profitability. This
study shows the statistical analysis to find the connection between the capital
structure and profitability of the listed banks, finance and insurance sector.

Firm’s
manager faces financial problem and issue regarding equity and debt decision.
Some of debt result has been mixed regarding the study of capital structure that has been
carried by scholars and researchers. According to the kochar(1997)
strategic assets can be do valued or strategy which sometimes facts-therefore
organizations do have ability to maintain and manage their policies regarding
their work of key understand that what can they get from their resources. So
organization should have to be more cautions regarding their policies and
resources they have. Therefore it is significant for firm in Nigeria to have
knowledge about debt credit mix which with eventually increase the firms
performance efficiently and effectively because by that they do have knowledge
of business functions and operation which is ultimately important for raising
fund in an organization and its operations research problem is to use the
resources and capital structure in optimal level and to get maximum positive
result that can be obtained of firm performs it’s operation with efficient and
in effective manner. Firms are affected by debt financing because there are
fixed which is to be rapid by companies agreement in specific period of time
those pay have nothing to do with the firms performance. Firm has to pay whether
they are getting profit or loss. While a firm which has its own funds that will
not have to repay anyone. Through that owner can gamble itself in organization
specially have venture its investor and through over external financing company
will result by over-leveraging. Which result wide variety of debt in the
business which ultimately results in barrier in business operation and
financial return, The study has been carried on this topic in bulk in different
advanced countries which do have effectively running stock market some of best
researcher has best knowledge has conducted regarding this topic in the context
of Pakistani and get help from the studies carried out by Pakistani firms. It
is obvious that there isn’t been any agreement regarding the structure of
capital on the value of Pakistani firm.

Generally,
banks involve in financial intervene to ensure effective compilation and
expenditure of funds to the real sector of the economy. Though other financial
institution continues to involve in the intermediation process banks are
treated the most financial intermediaries. According to Miller and Modigliani,
(1958, 1963, and 1977) “The aim of a firm is to maximize the wealth of a firm.
The link between capital structure and profitability has been subject of
exceptional breakthrough over the past decades throughout the irrelevance
theory. In the article of Miller and Modigliani (1958) irrelevance theory, they
quarrel that capital structure not linked to the firm’s value. In the presence
of corporate income tax and cost of capital in MM”so they quarrel that the
market value of the firm is linked to the value of long-term debt used in its
capital structure.

Structure
of the capital is maximum considerable discipline of company’s procedure. To
recognize in what way businesses, companies and firms finance their operation
or processes. It is essential to study determinates of their funding or capital
building choice. Decisions of company related to the financing involve an
extensive series of policy matter. For the capital market growth, rate of
interest, security price determination and guideline they have application at
the private. Such decision has been influence at capital structure, corporate
governance and development of company, (Green, Murinde and Suppakitjarak,
2002).

Association between the
capital building or structure and financial performance is that acknowledged
significant consideration in the finance literature how essential is
concentration of control for the company performance another words the types of
investor using, that control are question that journalists have tried to
answered for an extensive time previous studies show that capital structure has
relating with corporate governance which is the significant issue of state
owned enterprise. To study the impact of capital structure or financial
performance, will support us to identify the potential problems in performance
and capital structure. Capital structure denotes to a combination of a verity
of long period source of funds and equity shares as well as funds and surplus
of an enterprise. Understanding about capital structure
typically has been resulting from established economic that have many
institutional correspondences (Booth 2001). 
Main objective of the firm is to make profit and create a competitive
advantage when company process the objective that is to maximize the profit
same-time minimize the its cost of goods. Whenever companies search resources
related to the finance the debits investment they should take this objective
that is minimize the cost increase the profit in consideration.

Capital
structure as define by the Modigliani and Miller as capital structure is the
mixture of debt and equity that company uses in its operation.

The
main objective of this paper is that effect of the capital structure measure by
the debt ratio on the financial performance measure by the earing per share,
return on equity and return on the assets.

Generally,
banks involve in financial intervene to ensure effective compilation and
expenditure of funds to the real sector of the economy. Though other financial
institution continues to involve in the intermediation process banks are
treated the most financial intermediaries. According to Miller and Modigliani,
(1958, 1963, and 1977) “The aim of a firm is to maximize the wealth of a firm.
The link between capital structure and profitability has been subject of
exceptional breakthrough over the past decades throughout the irrelevance
theory. In the article of Miller and Modigliani (1958) irrelevance theory, they
quarrel that capital structure not linked to the firm’s value. In the presence
of corporate income tax and cost of capital in MM “so they quarrel that the
market value of the firm is linked to the value of long-term debt used in its capital
structure.

The
connection between profitability and capital structure is the one that acquires
appreciable attention in the finance literature. The study that tells us the
effects of capital structure on profitability will help us to know the complications
in the performance and in capital structure. The new industrial firms have to
take their firm into most complexes and in the most competitive environment.
Therefore, these types of research findings will be useful in selecting the
capital structure to achieve its greatest level of firm’s profitability. This
study shows the statistical analysis to find the connection between the capital
structure and profitability of the listed banks, finance and insurance sector.

Structure
of capital is the combination of debt and equity to finance the firm its
assets. The running business go to finance projects for which it needs to raise
funds from different sources and make capital mix. While newly born firm
finance all its assets from those funds. During the succession periods firm may
not distribute all its profit as dividend. But some proportion retain for
further investment in productive assets. In attempt of capital structure choice
firm’s goal is to maximize overall value. However, it is not an easy task to conclude
it accurately because irrelevant decision may lead to financially distress and
enhance probability of bankruptcy.

Modern theories mainly focus on factors of the structure
of capital characteristics and its effect on the performance of the business.
Aggarwal and Kyaw (2010) reported capital
structure and dividend policies can be used to control agency cost. Capital
structure and financing policies are internationally important to maximize
firms’ value (kayo & Kimura, 2010). Pachori and Totala (2012) found that
financial leverage strategy is riskier because wrong decision cannot be
successful in any period in which it is implemented. Rauh and Sufi (2010) is
described that determinants of capital structure and various debt types are
heterogeneous.

This finding suggests the capital structure choices
necessarily how and why the firm use different types, sources and priorities
for debt. In the promotion stage of the firm need to raise debt finance while
running business can internally generated funds provide to finance new
investment project (Rocca, Rocca & Cariola, 2009). In 2011, Uysal conducted
a study which showed that target capital structure useful for managerial
decision to acquire rival in order to dominant in economy. Capital structure
across the countries as the positive and significantly correlated firms value
(Psillaki & Daskalakis, 2009). 
Firm-specific factors on cross-country capital structure choices
significant and consistent with standard finance theories (Jong, Kabir &
Nguyen, 2008). Amidu (2007) also reported that the factors of capital mix
significantly influence firm’s value. Capital structure choices heavily rely on
debt (Delcoure, 2007).

The purpose of the study is to answer the question
that what should be the optimal capital structure of manufacturing firms.
Sheikh and Wang (2011) have worked on the capital structure of manufacturing
firms of Pakistani listed companies in KSE-100 Index from 2003-2007. But there
is no signal study specifically conducted on determinants of capital structure
impact on leverage of textile industries in Pakistan. In addition, economic and
energy crises several firms have been affected which in results major problems
faced by industries like corporate marriage or merger and acquisition,  probability of default and high rate of
unemployment occurred.

It has been
argued the profitable firms were less likely to depend on debt in their capital
structure then less profitable ones. It has also been argued that firms with a
high growth rate have a high debt to equity ratio. Bankruptcy costs were also
found to be a significant consequence on capital structure Kraus &
Litzenberger (1973), Harris & Raviv (1991). Capital structure decisions
affect a firm in two ways. Firstly, firms of the same risk class could possibly
have higher cost of capital with higher leverage. Secondly, capital structure
may affect the valuation of the firm, with more leveraged firms, being riskier,
being valued lower than less leveraged firms.

An
important question in capital structure theory relates to the size of the
firm’s financing decisions are driven by their own characteristics rather than
being the result of the institutional environment in which they operate Rajan
& Zingales (1995), Hall et al, (2004). Capital structure and dividend
policies can be used to control agency cost. Capital structure and financing
policies are internationally important to maximize firms’ value (kayo &
Kimura, 2010). Rauh and Sufi (2010) is described that determinants of capital
structure and various debt types are heterogeneous.  

The
capability of a firm in managing its financial policies is very important if
firm realize that something should be gained from its specialized resources. The raising of efficient funds in an organization will
help the corporation in its operations. Capital structure decision is
important for any business for maximizing profit to the different stock holders
and also to improve firm’s power to work in competitive atmosphere. Modigliani
& Miller (1958), Damodaran (2001), Chou (2007), Dare and Sola (2010), Saad
(2010), Pandey (2010)

The
objective of any corporation is to maximize the capital of the shareholder of
the firm. The term structure of capital represents the relationship between
debt and equity. This study focuses on the impact of capital structure on
financial performance. Capital structures play an important role determining
the risk level of the company and financial decision making process along with
other resources.
Capital structure decision is important for any firm for maximizing return to
the different stock holders and also to improve firm’s ability to work in
competitive atmosphere. Therefore the very important issue confronting managers
today is how to choose the mix of debt and equity to achieve best possible
capital structure that would minimize the firms cost of capital and improve
return to owners investment in the business. Does Capital structure
matter?? Some people say it does not matter but it does matter in developing
countries like Pakistan. The main problem is deciding the proportion of debt
and equity in capital structure. And this decision is depend on the owner’s
nature the owner is risk adverse, risk mediocre or risk taker. And owners choose
any strategy according to his/her nature. If the owner or shareholder is risk
averse so they choose first strategy that called un-geared/No debt strategy in
this strategy company don’t take it debt and they depend on totally equity in
this strategy the owner of the firm is risk adverse and in this strategy risk
is almost zero. In this strategy cost of debt is Zero percent. And second
strategy is Low Debt/ Geared If a firm’s owner choose this strategy so that
firm’s capital structure is probably like 20% debt and 80% equity. In this
strategy owner is risk mediocre and they take some risk for some high return
and in this strategy Weighted average cost of capital (WACC) is lower than
un-geared. Third strategy is High Debt/geared in this strategy the owner is
risk taker for the more profit in this strategy the capital structure is like
80% debt and 20% equity and weighted average cost of capital (WACC)  in this strategy is higher than both previous
cases. Different industries have different capital structure and nature of
business and culture and social norms are also impact on capital structure. Modigliani and miller
(1958) rejected the traditional view and came up with the new propositions to
explain the capital structure theory and here starts the birth of modern
capital structure theory. MM introduce the capital structure irrelevancy
propositions in their famous work on the cost of capital corporation finance
and the theory of investment. Schlosser (1989) defined as the capital structure
proportion of debt to the total capital of the firms. Bos and Fetherston (1993)
pointed out that capital structure, being total debt to total asset at book
value, influences both probability and riskiness of the firm.  

Capital
structure is most significant discipline of company’s procedure. To recognize in what way
businesses, companies and firms finance their operation or processes. It is essential to study
determinates of their funding or capital building choice. Decisions of company
related to the financing involve an extensive series of policy matter. For the
capital market growth, rate of interest, security price determination and
guideline they have application at the private. According to the Green, Murinde
and Suppakitjarak (2002) such decision has been influence at capital structure,
corporate governance and development of company.

This
study focuses on the relationship between structure of the capital, value and
profitability of registered corporations in Pakistan stock exchange (PSX). The
structure of capital is one of the most complicated issues in the corporate
finance. This theory is usually explained by the mixture of equity and debt
that make a whole capital. The part of debt and equity is up to finance
managers, that’s what percentage they choose of debt and equity”. “The decision of making
capital structure is an important one as the profitability of any organization
is based on this decision. So, full attention has to be given on this though
making the capital choice. In any organization, the overall position, including
all types of liabilities and assets has displayed. The term “capital structure”
is a mixture of equity share long term debt and preferred shares”. “A careful attention has
to be made when making the capital structure. With unplanned capital structure,
companies fail in using funds in the correct manner. It is important that the
company should realize that by making a plan of capital structure, it will
capitalize on the use of capitals and will be capable to adopt the changes
simply”.

According
to Miller and Modigliani, (1958, 1963, and 1977) “The purpose of a corporation
is to increase the capital of shareholders””. The
link between structure of the capital and firm’s performance and firm’s has
been issue of exceptional breakthrough over the previous years through the
irrelevance theory. Structure of the capital is not related to firm’s value the
study of (Miller and Modigliani 1958).

This
study is planned as follow. In chapter II, theoretical base has been described
along with the empirical findings. Chapter III covers the data description and
methodological issues and explains in details the methodology adopted. Chapter
IV is data analysis and discussion about empirical results. Finally, Chapter V
report conclusion recommendations and future research directions.

As
we know that capital structure effect on the profitability of any firm.
Therefore, this research receives highly significant because it focuses that
how a firm can choose their capital structure and how their capital structure
will affect it. Either it can affect positively or negatively. 

There
is a clear and a very big scope for more research to understand how capital
structure is made, how it mix with profitability, and what things of capital
structure make a big difference

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