Table of Contents

Abstract......................................................................................................................................2
1

Introduction.........................................................................................................................3
1.1

Problem Statement.......................................................................................................5

1.2

Objective of Study.......................................................................................................5

1.3

Limitation of Study......................................................................................................6

Literature Review...............................................................................................................7
2.1

Theoretical studies.......................................................................................................7

2.2

Empirical studies.........................................................................................................8

Research Design and Methodology..................................................................................12

3.1

Data............................................................................................................................12

3.2

Research Methodology..............................................................................................14

3.2.1

Research hypotheses..........................................................................................14

3.2.2

Empirical model.................................................................................................14

Analysis............................................................................................................................15

Conclusion........................................................................................................................19

References.........................................................................................................................21

Abstract
The basic purpose of my research project is to evaluate the impact of Capital Structure on the
Firms Financial Performance and Shareholders Wealth in Food sector of Pakistan. I have
conducted the regression analysis on my sample data of 30 Food sector firms for the year
2008 to 2013. I use the overall Food sector ROA ROE and EPS ratios as accounting measures
to evaluate the impact of Capital Structure on Firms Financial Performance and Shareholders
wealth. My result shows that the capital structure has negative significant relationship with
ROE and insignificant relationship with ROA and Shareholders wealth.

Keywords: Firms Financial Performance, Shareholders wealth, Optimal Capital Structure,

Return on Equity, Return on Asset, EPS, Debt to Equity ratio.

Introduction

In this research project we tried to evaluate the impact of Capital structure on Firms
Financial Performance and Shareholders wealth. We use two dependent variables that are
Firms performance and Shareholder's wealth to investigate the one independent variable
Capital structure. We tried to analyse the determinants of capital structure and find out the
optimal capital structure that increase the value of the firms financial performance and
shareholder's wealth.
First we should know that what it means by Capital Structure. The term capital structure is
used to represent the proportionate relationship between debt and equity. The various means
of financing represent the financial structure of an enterprise. The left-hand side of the
balance sheet (liabilities plus equity) represents the financial structure of a company.
Traditionally, short-term borrowings are excluded from the list of methods of financing the
firms capital expenditure. But for our research project we also include short-term borrowings
in shape of working capital requirements of the firm.
Capital structure is that capital structure at that level of debt equity proportion where the
market value per share is maximum and the cost of capital is minimum. Capital structure
refers to the different options used by a firm in financing their assets. A firm can go for
different levels of debts, equity, or other financial arrangements. It can combine the bonds,
TFCs, lease financing, bank loans or many other options with equity in an overall attempt to
boost the market value of the firm. In their attempt to maximize the overall value, firms differ
with respect to capital structures. This has given birth to different capital structure theories
that attempt to explain the variation in capital structures of firms over time or across regions.
Capital structure and its influence on the firm financial performance and shareholders wealth
has been remained an issue of great attention amongst financial scholars since the decisive
research of (Modigliani & Miller, 1958) arguing that under perfect market setting capital
structure doesnt influence in valuing the firm. This proposition explains that value of firm is
measured by real assets not, the mode they are financed. Only firms earning power of assets
influence on value of shareholders wealth and profitability.
Jensen & Meckling, (1976) drew concentration to the impact of capital structure on the
performance of enterprises, number of tests as an extension port to inspect the relationship
between performance of firm and shareholders wealth. Jensen and Meckling (1976)
demonstrates the amount of leverage in a firms capital structure affects the agency conflicts
3

between managers and shareholders and thus, can alter managers behaviours and operating
decisions. Since Jensen and Mecklings argument regarding capital structure influence on
firm performance, several researchers have followed this extension and have conducted
studies aimed at examining the relationship between capital structure and firm performance.
All researches suggest that there is an optimal capital structure the one that maximizes the
value of the firm and simultaneously minimizes the cost of capital thus striking a balance
between risk and return. All the firms do not use uniform capital structure they differ in their
financial decisions because it is not possible to provide financial managers with a precise
methodology for determining a firms optimal capital structure. It is a difficult task for
managers to take decision about capital structure where risk and cost is minimized and can
give more profits and also can increase shareholder wealth.
The relationship of decisions about capital structure with firm performance were suggested in
a number of theories, most famous are Modigliani and Miller Theory (1958) and (1963),
Agency Cost Theory (1976), Trade Off Theory (1977) and Pecking Order Theory (1984).
The Modigliani and Miller (1958) theorem which is also known as the capital structure
irrelevance principle was proposed by Franco Modigliani and Merton Miller in 1958. They
argue that under very restrictive assumptions of perfect capital market, investors
homogeneous expectations, tax-free economy and no transaction costs, capital structure do
not play any role in determining firm value. Their succeeding preference of entirely debt
financing is due to tax shield, in 1963, was a denial to traditional approaches, which advise an
optimal capital structure, Modigliani and Miller (1963). In actuality, determination of optimal
capital structure is not an easy job, Shoaib (2011). He argues that a firm may need to issue a
number of securities in a combination of debt and equity to meet an exact mixture that can
make best use of its value and having succeeded in doing so, the firm has achieved its optimal
capital structure.
Trade-off Theory by Miller (1977) refers to the thought that a company prefers how much
amount of debt finance and how much amount of equity finance to be used by considering
costs and benefits. According to this, if firms are highly profitable, then they would prefer
debt financing for increasing the shareholder wealth, further debt in a firms capital structure
gives more tax benefits. If a firm has low profit, then there is a larger probability of
bankruptcy if it uses more debt.
Pecking Order Theory (POT) is developed by Myers and Majluf (1984) according to this if
firms have high profits then internal financing would be used for new projects which can
maximize the value of shareholders. If retained earnings are not enough, then debt financing
4

is preferred and if additional financing is required, equity is issued. The choice of retained
earnings is preferred because it has nearly no cost. A range of research studies was performed
to check the influence of the decisions of capital structure on the firm performance. As capital
structure is chiefly based on two forms of finances that are equity and debt. Use of each form
of financing explains the mixed and conflicting conclusion on firm performance.
Jensen and Meckling (1976) express the sum of leverage in the capital structure of a firm
influences agency conflicts among shareholders and managers, and so can change managers
behaviours and operating decisions, and it is proved by Ebaid (2009). The survival of
information asymmetry is also a related concern in the decisions of the capital structure,
Sheikh and Wang (2011). Environmental dynamism and competitive environment play a
critical role in making the decisions of optimal capital structure.
If the firms are financing through debt they have to pay the interest to the banks and if they
are financing through equity they have to give the dividends to the shareholders from their
profit and sometimes generate the retained earnings account that they did not distributed to
the shareholders but reflecting their profit. We use the secondary data in our research in the
shape of Firms Financial Performance measures in accounting terms like ROA and ROE
ratios and Shareholders wealth accounting measure like EPS of the firms.

1.1 Problem Statement

It is quite problematic to design specific general Optimal Capital Structure for the firms that
maximize the firms performance profitability and Shareholders wealth regardless of their
size and other factors. The decision about the capital structure having the danger of violating
Agency cost theory in our Capital Structure Decisions we have to select the best possible
Capital Structure. The optimal Capital Structure in different countries and in different
economies has different ratios that contribute in the problem of analyzing their impact on
firms performance, Profitability and Shareholders wealth.

1.2 Objective of Study

To find out if there is any relationship between capital structure and firm performance and if a
relationship exists then to find out direction of relationship that whether relationship is
positive or negative.

1.3 Limitation of Study

In food sector there are total 51 companies listed on Karachi Stock Exchange (KSE) out of
which 30 companies were selected which were included in KSE 100 index. Because due to
unavailability of required data study sample reduced to 21 companies listed on KSE. We used
data from years 2008 to 2013 because data prior to these years, for some companies was not
available.

Figure1 Frame Work

Return on Assets

Debt/Equity Ratio

Return on Equity

Earning Per Share

Literature Review

First I will discuss the capital structure theories (Modigliani and Miller, trade-off, peckingorder end and agency cost theory) and then I will discuss empirical study.

2.1 Theoretical studies

First of all we discussed the works about the role of debt is Modigliani and Miller (1958).
They claim that owners of the firms are indifferent about its capital structure, because the
value of the firm does not depend on debt-to-equity ratio. Authors consider an ideal world
without taxes and any transaction costs. Later Modigliani and Miller (1963) introduce taxes
into their model and show that the value of a firm increases with more debt due to the tax
shield.
Modigliani and Millers work initiated further discussions about optimal capital structure.
Since their theory predicts 100% debt financing (due to substantial corporate tax benefit)
which is not observed in practice there should be some trade-off costs against the tax shield.
The actual level of debt is determined by tax advantage and these costs. Economists consider
bankruptcy costs, personal tax, agency costs, asymmetric information and corporate control
considerations as possible trade-off options against tax shield. This is the essence of the tradeoff theory, according to which higher profitability is related to higher leverage due to the tax
shield, but is not at the level of 100% of assets due to trade-off costs.
Myers and Majluf (1984) developed a pecking order theory of capital structure, according
to which firms initially use internal funds, then debt, and, if a project requires more funding,
equity. Therefore firms which are very profitable and generate sufficient cash flows will use
less debt.
Further studies of the relationship between leverage and firm performance can be divided into
two groups. The first one is based on the information asymmetries and signalling. Ross
(1977) came up with a model that explained the choice of debt-to-equity ratio by a
willingness of a firm to send signals about its quality. The core idea of Ross (1977) is that it is
too costly for a low-quality firm to abuse the market and signal about its high quality by
issuing more debt. As a result, low quality firms have low amount of debt, and the leverage
increases with the value of a firm. A similar model was developed by Leland and Pyle (1977):

the higher is the quality of the project manager wants to invest in the higher is the willingness
of the manager to attract financing. That is why a risky firm will end up with lower debt.
The second group of studies explains the relationship between capital structure and firm
performance through the agency costs theory, developed by Jensen and Meckling (1976) and
Myers (1977). Agency costs are related to conflicts of interest between different groups of
agents (managers, creditors, stockholders).
Thus, these theories provide quite alternative views on the relationship between capital
structure and firm performance.

2.2 Empirical studies

The different organizations having the different capital structure that they feel suitable for
them having the different debt to equity mix ratios. The basic goal of every organization is to
set optimal capital structure that increase the firms value in terms of performance and
increasing the share price and having the minimum cost of capital that we have to pay to our
borrowers from which we gave our debt and return that should gave to our equity holders.
Because any immature capital structure decision can increase the cost of capital.
The basic definition of optimal capital structure is setting the most suitable mix of equity and
debt financing for the firms that can contribute in the overall performance of the firm and its
profitability by decreasing the cost of capital normally referred to as Weighted Average Cost
of Capital (WACC).
Raheman, Zulfiqar and Mustafa, (2007) conducted research on 94 non final companies listed
on the Islamabad Stock Exchange (ISE) and used data from 1999 to 2004. Pearsons
correlation and regression analysis to find relationship between capital structure and firm
profitability were used and after analyzing financial statements of companies it is proved that
capital structure does impact firm profitability. After studying 400 companies from 12 sectors
and listed on the Tehran Stock Exchange (TSE), Pouraghajan, Malekian, Emamgholipour,
Lotfollahpour and Bagheri (2012) found that there is a significant relationship between
capital structure and firm performance. Nirajini and Priya (2013) used data of trading
companies listed in Sri Lanka from year 2006 to 2010 and used correlation and multiple
regression analysis and found that there is a significant relationship between capital structure
and firm performance.
Gupta (n.d.) the firms capital structure which increases the shareholders wealth and
decreases the firms cost of capital is referred to optimal capital structure of the firm. The
8

basic goal of optimal capital structure is to decrease the firms cost of capital and increase the
shareholders wealth and firms overall performance.
Saleem (2013) expressed that the best possible choice of debt and equity share that will
increase the shareholders wealth is referred to as capital structure of the firm. In above given
statement the purpose of setting the capital structure is defined as the set of equity and debt
combination that will maximize the shareholders wealth. If you are given the preferences to
the shareholders of the firm by giving them the higher returns you are more focused on the
shareholders wealth maximization that also results in increasing the overall firms value in
the market due to the goodwill created in the minds of their investors that are shareholders.
By using some of the literature written by different researchers to evaluate the effect of
capital structure of the firm on Firms Financial Performance and Shareholders wealth we
will try to inference the results either capital structure of a firm positively or negatively affect
the firms financial performance and shareholders wealth.
Saleem (2013) revealed that the some expert of corporate finance believed that capital
structure of a firm can maximize firms overall value with the help of minimizing its cost of
capital which is very debatable issue discussed in corporate finance theory about capital
structure to evaluate its impact on overall firms market value. In above given statement we
can inference the result as some of the corporate finance analysts think that for the purpose of
increasing firms value in the market the firms have to minimize their cost of capital and given
the less returns to the borrowers from which they finance their debt.
San & Heng (2011) suggest that decrease in WACC results in increasing the value of the firm
that is defined as optimal capital structure. There is no any specific formula or theory still
designed to conclusively define the optimal structure of the firm that increase the firms
overall value after lots of researches that have conducted on the concept of optimal capital
structure. The process of minimizing the weighted-average cost of capital (WACC) that will
maximize the firms value is known as optimal Capital structure selection. There have been
unlimited researches done in regard of designing the theory that equally provides the Optimal
Capital Structure of all the firms but did not succeeded yet.
Saleem (2013) revealed that by maintaining the balance between benefits of debt and cost of
debt associated with that benefit that will results in optimal capital structure according to
trade off theory. For the purpose of reducing agency cost and gain tax shield firms chose to
finance its operations through debt financing. The benefit from debt financing is that the
firms can gain tax benefit and reducing the agency cost by not giving the ownership right to
the equity holders if they go for the equity financing rather than debt financing.
9

In order to analyze the effect of Capital structure on firms financial performance we have to
examine the return on assets of that particular firm. The firms purpose is to select the type of
capital structure that increase their returns on assets and in a result increase the profitability
of the firm.
Li & Cui (2003) implies that to increase the worth of equity for shareholders managers make
decisions of financing their operations according to capital structure theories. The basic goal
of the managers is to maximize the value of the firm by attaining higher profits those results
in the maximization of shareholders wealth so we can say that capital structure substantially
affect the shareholders wealth.
San & Heng (2011) investigate that there is some kind of relationship between firms
financial performance and capital structure of the firm either positive or negative.
Velnampy & Niresh (2012) investigate that profitability of the firms is dependent upon the
capital structure decisions of the firm having the different debt and equity combination that
can well suited to increase the profitability of the firm. The important part of the firms
financial strategy is to prosperous choice and use of its capital. The relationship between
firms capital structure and the firms profitability is very significant as the profitability of the
firm can be directly affected by the capital structure decisions of the firms. Decision about
firms Capital structure is very important element in the firms overall strategy.
According to Skopljak & Luo (2012) Agency cost theory defines that difference of the goals
of Managers and the owners of the firms can affect the overall performance of the firm in
terms of its market value and profitability.
Chowdhury & Chowdhury (2010) expressed that in order to increase the shareholders wealth
the suitable selection of capital structure of the firm between debt and equity combination
plays the vital role. In order to define firms value by implementing the process of future cash
flows discounting technique, WACC is used. The purpose of selecting the right capital
structure of the firms is to maximize the firms value, profitability and shareholders wealth.
Soumadi & Hayajneh (n.d.) revealed that in the literature written in corporate finance the
concept of relationship between firms performance and capital structure is the most
debatable concept that also given the strong considerations by financial economists of both
financial and non-financial firms.
Berger and Patti (2006) also found a positive relation between capital structure and firm
performance as Abor (2005) found. Over the entire range of observed data, the relationship
between capital structure and firm performance is positively correlated and increase in debt
would lead to better firm performance, Margaritis and Psillaki (2007). Campello (2007)
10

found that if debt is increased and firms assets are more tangible then firms performance
will also increase compared to the rivals in the market. Jang, Tang and Chen (2008) examined
that firm value increases if only debt is used for financing activities. According to Cheng, Liu
and Chien (2010) if the leverage is at a moderate level, then capital structure will be
positively related to firm performance. Champion (2010) and Morogie and Erah (2010) also
favored Margariti and Psillaki (2007) by finding that profitability is positively related to
capital structure of firms. Chowdhury and Chowdhury (2010) conducted a research on 77
companies listed on the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange
(CSE), results showed that capital structure does impact a companys performance and the
correlation was strongly positive. Capital structure and firm performance are related to each
other positively, Shoaib and Siddiqui (2011). Mustapha, Ismail and Badriyah (2011)
randomly selected 235 Malaysian companies listed. It was concluded that a positive relation
between leverage and profitability, asset tangibility and firm growth. Firm profitability is
related to capital structure in a positive relation, that is, if capital structure increases, then
profitability will also lead to a reasonable change increase, Aman (2011). Park and Jang
(2013) also found a positive relation between capital structure and firm performance after
examining the data from 1995 to 2008 of 308 restaurant firms. Debt can efficiently be used to
reduce free cash flows and to increase firm profitability, Park and Jang (2013). Capital
structure does impact firm performance in a positive way, Nirajini and Priya (2013) found
after analyzing financial statements of companies in Sri Lanka. Mitani (2014) chose 799
manufacturing firms listed on the Tokyo Stock Exchange (TSE) and presented the evidence
of positive correlation between leverage and market share under both types of competition,
Cournot competition and Bertrand competitions.
Abdul (2012) conducted a similar study to determine the relationship between capital
structure decisions and the performance of firms in Pakistan. The study concluded that
financial leverage has a significant negative relationship with firm performance as measured
by ROA, GM, and Tobins Q. The relationship between financial leverage and firm
performance as measured by the return on equity (ROE) was negative but not statistically
significant. In another study, Javed and Akhtar (2012) explored the relationship between
capital structure and financial performance. They concluded that there is a positive
relationship between capital structure and financial performance and growth and size of the
companies. The study which focused on the Karachi Stock Exchange in Pakistan, used
correlation and regression tests on financial data. The findings of the study are consistent with

11

the agency theory. This study however isolated the other financing decisions and focused
only on capital structure.
By looking at all above discussed researches we can conclude that the relationship between
the firm's capital structure and the firms overall performance, profitability and shareholders
wealth is present. The firms should look for the optimal capital structure that minimize the
WACC and maximize the firms value and their share price to maximize shareholders wealth.
To measure the financial performance of the firm we can calculate the financial ratio related
to the income statement and balance sheet of the firms and try to analyze the impact of capital
structure of the firm on these financial ratios that adversely or positively impact the firms
performance.

12

Research Design and Methodology

This section further comprises of two sub sections. Section 3.1 explains data and 3.2 explain
the research methodology.

3.1 Data
The reference period of the study is of six years which is from the financial year 20082013.In these study thirty (30) firms of Food sector of Pakistan has been taken as sample. All
the sample firms are listed in Karachi stock exchange in Pakistan and the data-base of the
study is completely based on secondary data which has been collected from various web sites
and annual financial reports of the sample firms. For the purpose of achieving the objectives
of study the Profitability Ratio return on equity, return on assets and earning per share are
taken as dependent variable and debt-to-equity ratio is taken as independent variables.

Table1
Variables Measurements
Variable

Measures

Dependent Variables
Profitability

ROE, ROA, EPS

Independent variables
Capital structure

Debt/Equity Ratio

Notes: Above table shows that profitability is our dependent variable and it is measured by net income divided
by average equity and net income divided by total assets and net income divided by weighted average number
of shares . We use capital structure ratios as independent variables.
Data Source: Karachi stock exchange

Explanation of variable:
Table 1 explains about the dependent and independent variables used in this research study.
As above table shows debt- to-equity is our independent variable, while return on assets,
return on equity and earning per share is our dependent variables. The debt-to-equity ratio
means the firms indicates what proportion of equity and debt the company is using to finance
its assets. Total liabilities/Total shareholders equity measures of a company's financial
leverage. Total liabilities include short term liabilities, reserves, deferred tax liabilities, non
controlling interest, and any other noncurrent liability.
The return on equity ROE means amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested. Net
13

income/Total assets an indicator of how profitable a company is relative to its total assets.
ROA gives an idea as to how efficient management is at using its assets to generate earnings.
Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a
percentage. Sometimes this is referred to as return on investment. Net income/Weighted
average no. of shares EPS represents the portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serve as an indicator of a company's
profitability.

Table 2
Summary Statistics of Food Sector of Pakistan
Variables
ROE
ROA
EPS
D/E Ratio

MEAN

STD.DEV

MIN

MAX

1.42
0.45
17.09
-12.13

15.867
0.222
45.79
174.85

-3.2664
-1.96
-51.35
-2341.85

212.83
0.78
301.14
39.5

NOTES: Table 2 explains the summary statistics of food sector of Pakistan. Mean is central tendency,

STD.DEV is standard deviation, MIN is minimum value, and MAX is maximum value. ROA is return
on assets, ROE is return on equity, EPS is earning per share and D/E ratio is Debt-to-Equity ratio.
Data source: Self calculated on state bank data of Pakistan.

Table 2 enlighten the descriptive statistics of food companies in Pakistan. Descriptive

statistics means a set of concise illustrative coefficients that abridges given information set,
which can either be a representation of the whole populace or a specimen. The measures used
to depict the information set that are measures of focal propensity and measures of variability
or scattering. Descriptive statistics is a useful way to summarize the data and it gives us the
meaningful results by performing empirical and analytical analysis, as they give a past
account of return behavior. Even though past information is helpful in any analysis, we
should always think about the prospect of future events. Measures of central tendency contain
the mean, median and mode, on the other hand measures of variability contain the standard
deviation (or variance), the minimum and maximum variables. The above table shows the
mean, standard deviation, maximum and minimum values of our dependent and independent
variables. Mean is the basic numerical average of a set of two or more numbers. The mean
can be calculated in more than one way. We can calculate the Mean by using Arithmetic mean
and Geometric mean. Standard deviation is used to find the dispersion in a data set. More

14

dispersion in a data set means higher the standard deviation. Standard deviation is the square
root of variance .Maximum and minimum shows the highest and lowest value in a data set.

3.2 Research Methodology

In this research, to test the impact of independent variable on dependent variable multiple
linear regression models are used. This section is further divided into two sub sections where
sub section 3.2.1 explains Research hypotheses and sub section 3.2.2 represents Empirical
model.

3.2.1 Research hypotheses

H1: There is a significant positive relationship between the capital structure and financial
performance of selected firms.

H2: There is a significant negative relationship between the capital structure and financial
performance of selected firms.

H3: There is a significant positive relationship between capital structure and shareholders
wealth of selected firms.

H4: There is a significant negative relationship between capital structure and shareholders
wealth of selected firms.

3.2.2 Empirical model

ROE=0 + 1 (D/E Ratio) +

ROA= 0 + 1 (D/E Ratio) +

EPS= 0 + 1 (D/E Ratio) +

Where:
ROE stands for return on equity and 0 is intercept, 1 coefficients of our research.1 is the coefficient
of Debt-to-equity ratio
ROA stands for return on assets and 0 is intercept, 1 coefficients of our research.1 is the coefficient
of Debt-to-equity ratio.
EPS stands for earning per share and 0 is intercept, 1 coefficients of our research. 1 is the coefficient
of Debt-to-equity ratio.

15

Analysis

This section explains the results and analysis of our research study. To test the impact of
explanatory variable on dependent variable multiple linear regression models are used. First
of all data is tested for correlation. Correlation is an association among two variables or one
variable with other variable.

Table 3
Correlation among Explanatory Variables for Food Sector
Variables
D/E ratio
ROA
ROE
EPS

D/E ratio

ROA

ROE

EPS

1
0.046
-1
0.56

1
-0.056
0.35

1
-0.045

Table 3 explains the Correlation results of food sector of Pakistan. Correlation is used to
measure how two random variables are related. Because standard deviation is always
positive, the sign of the correlation between two variables must be the same as that of the
covariance between the two variables. If the correlation is positive, we can say that variables
are positively correlated. If it is negative, we can say that they are negatively correlated; and
if it is zero, we say they are uncorrelated. Furthermore, it can be proved that the correlation is
always between +1 and -1. ROA is also positively correlated with D/E ratio. ROE is
negatively correlated with D/E ratio. It also shows there is a significant relationship between
variables. EPS is positively correlated with D/E ratio.

16

Table 4
IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING
LINEAR REGRESSIONS
ROA
Intercept

COEF
00.46

T VALUE
2.78

P>=t
0.006

D/E ratio

(0.0166)
0.000058

0.61

0.541

(0.00095)
Notes: R2=0.0021, Adjusted R2= -0.0035, No of obs. 180, Prob. > F 0.54 COEF is coefficient and it

shows the impact of independent variable on dependent variable, PROB is probability. Intercept
depicts that there are other factors that impact our dependent variable other than variables used in our
study.
Data source: Self calculated on state bank of Pakistan data.

Table 4 demonstrate the regression analysis used to find the relationship among return on
assets and debt to equity ratio. R2 explicate how much independent variable explains the
dependent variable, while adjusted R 2 tells about the model fit. Intercept depicts that there are
other factors that impact our dependent variable other than variables used in our study. The
result shows that ROA has insignificant positive relationship with debt-to- equity ratio, which
means that an increase in debt-to-equity by one will increase the ROA by 0.0058%.
Significance level is not less than 5% so there is insignificant relationship exists between
these variables.

Table 5
IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING
LINEAR REGRESSIONS
ROE
Intercept

COEF
0.32

T VALUE
4.63

P>=t
0.000

D/E ratio

(0.68)
-0.091

-229.86

0.000

17

(0.003)
Notes: R2=0.99, Adjusted R2=0.99, No of obs. 180, Prob.>F= 0.000 COEF is coefficient and shows the

impact of independent variable on dependent variable, PROB is probability. Intercept depicts that
there are other factors that impact our dependent variable other than variables used in our study.
Data source: Self calculated on state bank of Pakistan data.

Table 5 demonstrate the regression analysis used to find the relationship among return on
equity and debt to equity ratio. R2 explicate how much independent variable explains the
dependent variable, while adjusted R 2 tells about the model fit. Intercept depicts that there are
other factors that impact our dependent variable other than variables used in our study. The
result shows that ROE has significant negative relationship with debt-to- equity ratio, which
means that an increase in debt ratio by one will decrease the ROE by 9.1%. Significance level
is less than 5% so there is a strong relationship exists between these variables.

Table 6
IMPACT OF INDEPENDENT VARIABLE ON DEPENDENT BY UTILIZING
LINEAR REGRESSIONS
EPS
Intercept

COEF
17.27

T VALUE
5.04

P>=t
0.000

D/E ratio

(3.43)
0.015

0.74

0.46

(0.020)
Notes: R2=0.0031, Adjusted R2= -0.0026, No of obs. 180, Prob.>F= 0.46 COEF is coefficient and

18

shows the impact of independent variable on dependent variable, PROB is probability. Intercept
depicts that there are other factors that impact our dependent variable other than variables used in our
study.
Data source: Self calculated on state bank of Pakistan data.

Table 6 demonstrate the regression analysis used to find the relationship among earning per
share and debt to equity ratio. R2 explicate how much independent variable explains the
dependent variable, while adjusted R 2 tells about the model fit. Intercept depicts that there are
other factors that impact our dependent variable other than variables used in our study. The
result shows that EPS has insignificant positive relationship with debt-to- equity ratio, which
means that an increase in debt ratio by one will increase EPS by 1.5%. Significance level is
not less than 5% so there is insignificant relationship exist between these variables.

Conclusion

The purpose of this research study is to determine relationship between capital structures and
profitability of food sector of Pakistan. For this purpose 30 food sector firms selected as study
sample and data is collected for the period of 2008-2013. In this study debt-to- equity ratio
used as independent variable while ROA, ROE, EPS used as dependent variables. First of all
data is tested for correlation in order to check the association between explanatory variables.
The results show that there is insignificant relationship between ROA and D/E ratio and EPS
and D/E ratio. Similarly there is a significant relationship between ROE and D/E ratio. To test
the impact of explanatory variable on dependent variable we utilize linear regressions model.
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Results demonstrate that there is a negative relationship between capital structure and
profitability and there is insignificant relationship between shareholders wealth and capital
structure so reject both H3 and H4. Since the capital structure has strong negative relationship
with ROE, so accept H2.

Future Study
I carry out the research on the topic of impact of capital structure on the profitability of food
sector of Pakistan. In order to expand this topic it should be look at by other researchers as
this area demand a lot of work for making Pakistan development. The Government of
Pakistan should award more importance to its all aspects in an effectual way. In this research
study i have worked on the secondary source of data so policy makers of food sectors like
health commission of Pakistan should given more importance to the primary source of data
collection for this topic of research. Due to shortage of time my study is bound with tight
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period of time schedule as six years data collection it should be given long period of time in
order to get more meaningful and better results. As food sector is growing day by day, it
requires effective marketing strategies to expand business. Researches need to identify
effective strategies to help the managers of food sector. For precise marketing policy for food
company would be to construct on confirmed calculated marketing ideology, along with a
spotlight on varying purchaser manners. Bring into cooperation of digital media in the course
of Internet marketing plan for improving effectiveness and awareness to consumers is the best
marketing strategy that can provide the foundation for a transformed business model. On the
other hand, there should be some forecast for using digital media for marketing too. It should
be a multi-channel marketing scheme but should recognize the target viewers. The focus
should be on the high value purchaser sector for food produce. To prepare for a marketing
strategy, it is also vital to know the active markets as well as up-and-coming markets of food
for the productivity in this sector.

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