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Problem Statement
Because of high leverage the SME`s are missing their investment opportunities.
Objective
To identify the impact of leverage on firms and shareholders investment decision in
Pharmaceutical industry of Pakistan.
Hypothesis
H1: leverage has significantly negative impact on firms investment decision.
H2: Leverage has significantly negative impact on share-holders investment decision.
H3: RE significantly moderating the effect on the share-holders investment decision.
H4: Liquidity is significantly mediating the effect on firms investment decision.
Research Questions
1)
2)
3)
4)
Theoretical Frame-work
Leverage
RE
Liquidity
Investment
Decision
Firms
Investment
Decision
Variables
Leverage:
Lev denotes leverage. We have used the same definition of leverage as lang. et al (1996), namely
the ratio of total liabilities to the book value of total assets. He pointed that the market value
leverage gives too much weight to the deviations in equity value. The book value of leverage
does not reflect recent deviation in the market valuation of the firm.
LIQUIDITY (LIQ):
The liquidity ratio is measured by the current assets divided by the current liability and is the
ability of firms to meet its current obligations. Firms should ensure that they do not suffer from
lack of liquidity as this may result in to a state of financial distress ultimately leading to
bankruptcy.
RETAINED EARNINGS (RETES):
It represents the amount of business savings meant for giving back. These are the most favored
sources of finance for corporate firms.
METHODOLOGY and DATA COLLECTION
I will use a reduced form of investment equation to examine the effect of leverage on investment.
The data I will use in this paper will be from the annual reports of Pakistani pharmaceutical
companies which are listed on Karachi stock exchange.
I will use the regression results for the investment equation using the two Alternative measures
of leverage and three different methodologies: pooling regression, Random effect model, and
fixed effect model. To identify which empirical methodology pooling, random effect, or fixed
effect Regression is most suitable; I will perform two statistical tests: the first is the Lagrangian
Multiplier (LM) test (Breusch and Pagan, 1980) of the random effect model. Second, I will
conduct the Hausman specification test (Hausman, 1978) to compare the Fixed effect and the
random effect models.