Literature Review

Submitted to:

Kashif Ahmad

Submitted by:
Umar farooq shah (1535127)
Muhammad Sheryar (1535123)
Waqar khan khattak (1535128)

Impact of Capital Structure on Firms

Fianacial Performance and Shareholders
Wealth: Textile Sector of Pakistan
(Literature Review)
Mahfuzah and Yadav (2012) investigated the relationship between capital structure and firm
performance. They used panel data procedure for a sample of 237 Malaysian listed companies
on the Bursa Malaysia Stock exchange during 1995-2011. Four performance measures
(including return on equity, return on asset, Tobins Q and earning per share) were used as
dependent variable. The five capital structure measures (including long term debt, short term
debt, total debt ratios and growth) were used as independent variables. Size is a control
variable. The results indicated that a firms performance has a negative relationship with short
term debt (STD), long term debt (LTD), total debt (TD). Moreover, they found positive
relationships between the growth and performance for all the studied sectors. Tobins Q
reports demonstrate a significant positive relationship between short term debt (STD) and
long term debt (LTD). It also reports that total debt (TD) has a significant negative
relationship with the performance of the firm.
Hutchinson (1995) claimed that debt to equity ratio (financial leverage) had a positive effect
on the firms ROE provided that earnings power of assets exceeds the average cost of debt to
the designated firm.
Taub (1975) also found a significant positive relationship exists between debt ratio and
profitability measures used. Besides, positive association between debt ratios and profitability
of the firm were identified by Nerlove (1968), Baker (1973) and Petersen and Rajan (1994).
Saleem (2013) communicated that the most ideal decision of debt and equity share that will
expand the shareholder's wealth is referred to as capital structure of the firm. In above given
articulation the reason for setting the capital structure is characterized as the arrangement of

equity and debt combination that will expand the shareholders wealth. On the off chance that you
are given the preference to the shareholders of the firm by giving them the higher returns you are
more focused on the shareholders wealth amplification that likewise brings about expanding the
by and large organizations worth in the business sector because of the goodwill made in the
brains of their investor that are shareholders.
Saleem (2013) By utilizing a portion of the writing composed by diverse analysts to assess the
impact of capital structure of the firm on Firm's Financial Performance and Shareholder's wealth
we will attempt to inferring the outcomes either capital structure of a firm positively or
negatively influence the firmsfinancial performance and shareholder's wealth.
Saleem (2013) uncovered that the some expert of corporate account trusted that capital structure
of a firm can expand company's overall worth with the offer of minimizing its some assistance
with costing of capital which is exceptionally questionable issue examined in corporate money
hypothesis about capital structure to assess its effect on by and large company's reasonable
worth. In above given declaration we can deduction the outcome as a portion of the corporate
fund examiners feel that with the end goal of expanding company's worth in the business sector
the organizations need to minimize their cost of capital and given the less comes back to the
borrowers from which they back their debt.
San and Heng (2011) uncovered that decline in WACC results in expanding the evaluation of the
firm that is characterized as ideal capital structure. There is no a particular recipe or hypothesis
still intended to decisively characterize the ideal structure of the firm that build the company's
overall worth after lots of inquires about that have led on the idea of ideal capital structure. The
procedure of minimizing the weighted-average cost of capital (WACC) that will amplify the
firms quality is known as ideal Capital structure determination. There have been boundless
looks into done in respect of planning the hypothesis that just as gives the Optimal Capital
Structure of the considerable number of firms yet did not succeeded yet.
Saleem (2013) uncovered that by keeping up the harmony between advantages of obligation and
expense of obligation connected with that advantage that will brings about ideal capital structure
as indicated in terms of professional career off hypothesis. With the end goal of lessening office
cost and pick up duty shield firms financed its operations through obligation financing. The

advantage from obligation financing is that the organizations can pick up tax break and lessening
the office cost by not giving the proprietorship right to the value holders on the off chance that
they go for the value financing as opposed to obligation financing. With a specific end goal to
investigate the impact of Capital structure on company's monetary execution we need to look at
the arrival on resources of that specific firm. The organizations reason for existing is to choose
the kind of capital structure that expand their profits on resources and in an outcome build the
benefit of the firm.
Li and Cui (2003) infers that to expand the value of value for shareholders supervisors settle on
choices of financing their operations as per capital structure hypotheses. The essential objective
of the administrators is to boost the estimation of the firm by accomplishing higher benefits those
outcomes in the augmentation of shareholders riches so we can say that capital structure
generously influence the shareholder's riches.
San and Heng (2011) uncovered that there is some sort of relationship between association's
monetary execution and capital structure of the firm either positive or negative.
Velnampy and Niresh (2012) uncovered that benefit of the association's is subordinate upon the
capital structure choices of the firm having the distinctive obligation and value blend that can
appropriate to expand the productivity of the firm. The imperative piece of the company's money
related procedure is to prosperous decision and utilization of its capital. The relationship between
association's capital structure and the company's gainfulness is extremely noteworthy as the
productivity of the firm can be specifically influenced by the capital structure choices of the
organizations. Choice about firms Capital structure is critical component in the organizations
general technique.
As indicated by Skopljak and Luo (2012) Agency cost hypothesis characterizes that distinction
of the objectives of Directors and the proprietors of the organizations can influence the general
execution of the firm as far as its fairly estimated worth and productivity.
Chowdhury and Chowdhury (2010) communicated that so as to build the shareholder's riches the
suitable determination of capital structure of the firm in the middle of obligation and value mix
assumes the crucial part. With a specific end goal to characterize company's worth by executing
the procedure of future money streams marking down method, WACC is utilized. The motivation

behind selecting the right capital structure of the organizations is to boost the association's worth,
productivity and shareholders riches.
Soumadi and Hayajneh (n.d.) uncovered that in the writing written in corporate money the idea
of relationship between company's execution and capital structure is the most easily proven
wrong idea that additionally given the solid contemplations by monetary business analysts of
both budgetary and non-monetary firms. By taking a gander at all above examined explores we
can reason that the relationship between the association's capital structure and the organizations
general execution, benefit and shareholders riches is available. The organizations ought to search
for the ideal capital structure that minimize the WACC and expand the association's quality and
their offer cost to amplify shareholders riches. To gauge the budgetary execution of the firm we
can figure the money related proportion identified with the wage proclamation and monetary
record of the organizations and attempt to dissect the effect of capital structure of the firm on
these monetary proportions that unfavorably or decidedly affect the firms performance.

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