Impact of Capital Structure and Dividend Policy on Firm Value

Abstract

The study aimed to investigate the impact of capital structure and dividend policy on firm value of KSE non financial listed firms using cross sectional time series regression analysis for the period 2006-2013 in Pakistan. The study uses fixed effect Model to measure the disparities of intercepts for each group considering fixed coefficient for independent variables and fixed variance among groups of the panel data. The results of the study reporting number of variables of capital structure and dividend policy has significant impact on dependent variable (tobin’s Q). Three independent variables (TDTA as leverage ratio, SG as profit sustainability ratio and EQ as shareholders equity) of capital structure, while one independent variable (EPS as profitability ratio) of dividend policy has significant impact on dependent variable (tobin’s Q). The left behind two variables (FATO as performance ratio of capital structure and DPO as cash flow indicator ratio of dividend policy) are not significant with depended variable (tobin’s Q). Elaborately; EPS approve the prophecy of signaling theory while EQ, TDTA and SG statistically confirm assumptions of trade off theory and pecking order theory. Furthermore FATO fail to support the trade off hypothesis while DPO fail to favor the signaling theory postulations. Consequently our research analysis approves the hypothesis of pecking order theory and trade off theory in case of capital structure and signaling theory in case of dividend policy.

Keywords: Capital Structure, Dividend Policy, Firm Value