DETERMINANTS OF CAPITAL STRUCTURING: AN EMPIRICAL STUDY OF GROWTH AND FINANCING BEHAVIOR OF FIRMS OF TEXTILE SECTOR IN PAKISTAN

Abstract

Purpose- Purpose of this study is to investigate the determinants of optimal capital structuring that affect growth and financing behavior of textile sector firms in Pakistan keeping in view the important role capital structuring plays in any firm's financial management decisions and the positive contribution it makes to the creation of firms' value and profitability. Methodology/sample- Size of the firm (capital), profitability, fixed assets structure and taxes were used as control variables to investigate the determinants of optimal capital structuring of textiles companies. A sample size of 90 textile companies across the country were selected and their data for the 2005 - 2010 period was used. The determinants of optimal capital structure were examined using correlation and regression analyses. F-value was calculated to test the fitness of the overall model. Findings- Results of the study showed a negative relationship between dependent variable financial leverage and independent variables. The statistical analysis of spinning and composite unit also showed consistency of results with the overall textile sector but the outcome of weaving unit showed a significantly positive relationship between dependent and independent variables. Practical Implications- The findings enhance the knowledge base of determinants of optimal capital structure and are likely to help companies take effective decision related to capital structure needs. Furthermore, the study is likely to help the decision makers better adjust themselves towards adopting and considering proficient ways of managing capital structure of a firm.