Capital Structure Decision, Importance and implementation(The Case of KSE)

Abstract

Financial management of the capital structure decision is one of the most important decisions. Capital structure decisions in the areas of corporate finance are at the heart of many decisions. These so dividend policies, project financing, the issuance of long-term securities, mergers and financing of copies, and so on. This thesis focuses on the determinants of capital structure for the non-financial firms listed on the Karachi Stock exchange (KSE). The sample period selected for the study was 1993-2002. The effect of five explanatory variables is measured on leverage ratio which is calculated by dividing the total debt by total assets.  We first present some descriptive statistics on our selected variables. The most interesting finding of our descriptive statistics is the highest leverage ratio for textile industry whereas the average profitability of textile industry is negative.  Our explanation of this fact is the continuous year to year understatement to the profit by family controlled firms in the textile industry in order to deprive government of taxes and minority shareholders of dividend. The profit figure is thus negative on average for all years that brings down the equity figure and raises the debt percentage in overall financing. We used five explanatory variables to measure their effect on leverage ratio.  Three of our variables were significantly related to leverage ratio whereas the remaining two variables were not statistically significant in having relationship with the debt ratio.  Our results approve the prediction of trade-off theory in case of tangibility variable whereas the growth (GT) variable confirms the agency theory hypothesis. Size (SZ) variable neither confirms to the prediction of trade-off theory nor to asymmetry of information theory.

KEY WORDS; Capital structure, Karachi Stock exchange, Dividend policies