DETERMINANTS OF CORPORATE FINANCING PATTERNS AND THEIR IMPACT ON CORPORATE FINANCIAL PERFORMANCE By Syed Muhammad Amir Shah PM091013 M. Nauman Farooqi, Ph.D. Associate Professor of Finance Department of Commerce Faculty of Social Sciences Mount Allison University, Canada (Foreign Evaluator) Dr. Halit Gonenc Assistant Professor of Finance University of Groningen The Netherlands (Foreign Evaluator) ___________________________ Prof Dr. Syed Tahir Hijazi (Thesis Supervisor) ______________________ Mr. Ansir Ali Rajput (Head of Department, Management Sciences) _________________________ Dr. Anwar F. Chisti (Dean, Management Sciences) DEPARTMENT OF MANAGEMENT SCIENCES MOHAMMAD ALI JINNAH UNIVERSITY ISLAMABAD PAKISTAN July 2010 i COPYRIGHT © BY Syed Muhammad Amir Shah All rights are reserved. No part of the material, protected by this copy right notice may be reproduced or utilized in any form or any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the permission from the author. ii CERTIFICATE This is to certify that Syed Muhammad Amir Shah has incorporated all observations, suggestions and comments made by the external evaluators as well as the internal examiners and thesis supervisor. The title of his Thesis is: DETERMINANTS OF CORPORATE FINANCING PATTERNS AND THEIR IMPACT ON CORPORATE FINANCIAL PERFORMANCE. Forwarded for necessary action _______________________ Prof Dr. Syed Tahir Hijazi (Thesis Supervisor) iv DEDICATION Dedicated to my beloved parents whose prayers always pave the way to success for me v TABLE OF CONTENTS COPYRIGHT © BY Syed Muhammad Amir Shah ........................................................ ii CERTIFICATE .................................................................................................................. iv DEDICATION ..................................................................................................................... v TABLE OF CONTENTS ................................................................................................... vi ACKNOWLEDGEMENT ................................................................................................. ix ABSTRACT ......................................................................................................................... x CHAPTER 1 ........................................................................................................................ 4 1 INTRODUCTION .......................................................................................................... 4 1.1 Unique Characteristics in Pakistani Environment .................................................. 4 1.2 Research Questions ................................................................................................ 4 1.3 Research Objectives ............................................................................................... 5 1.4 Significance of the StudY ....................................................................................... 5 CHAPTER 2 ........................................................................................................................ 7 2 FINANCIAL MARKETS IN PAKISTAN ................................................................... 7 2.1 An Overview of Financial Markets In Pakistan ..................................................... 7 2.2 Corporate Debt Securities..................................................................................... 19 2.3 Equity Securities Market ...................................................................................... 29 CHAPTER 3 ...................................................................................................................... 33 REVIEW OF LITERATURE .......................................................................................... 33 3 Context of the Research .......................................................................................... 33 3.1 Static Trade off Theory ........................................................................................ 33 3.2 Pecking Order Theory .......................................................................................... 35 3.3 Ownership Context ............................................................................................... 37 3.3.1 Agency theory –Managerial Ownership ....................................................... 38 3.3.2 Maturity ......................................................................................................... 40 3.3.3 Institutional Ownership ................................................................................. 41 3.3.4 Business Groups ............................................................................................ 42 3.4 Corporate Financial Performance ......................................................................... 43 CHAPTER 4 ...................................................................................................................... 46 METHODOLOGY AND DATA SOURCE .................................................................... 46 4.1 Theoretical Model ................................................................................................ 46 4.2 Explanation of the Model ..................................................................................... 47 4.2.1 Fixed Assets .................................................................................................. 47 4.2.2 Growth .......................................................................................................... 48 4.2.3 Profitability ................................................................................................... 48 4.2.4 Business Risk ................................................................................................ 49 4.2.5 Information Asymmetry ................................................................................ 50 4.2.6 Managerial Ownership .................................................................................. 51 4.2.7 Family Ownership ......................................................................................... 52 4.2.8 Institutional Ownership ................................................................................. 52 4.2.9 Group Business ............................................................................................. 53 4.3 Financing Patterns ................................................................................................ 53 4.4 Impact of financing patterns on corporate financial performance ........................ 54 4.5 Model Specification.............................................................................................. 55 vi 4.5.1 Application of Static Trade Off Theory ........................................................ 55 4.5.2 Application of Pecking Order Theory ........................................................... 56 4.6 Data Source .......................................................................................................... 58 CHAPTER 5 ...................................................................................................................... 59 ANALYSIS AND RESULT .............................................................................................. 59 5 Descriptive Statistics ............................................................................................... 59 5.1 The Impact of Financing Patterns on Corporate Financial Performance ............. 79 5.2 Sugar Sector Analysis .......................................................................................... 86 5.3 Descriptive Statistics ............................................................................................ 87 5.4 Trade Off Theory .................................................................................................. 87 5.5 Fixed Effect Model ............................................................................................... 88 5.6 Testing Pecking Order Theory ............................................................................. 92 5.7 Impact of Financing Patterns on Corporate Financial Performance .................... 95 CHAPTER 6 CONCLUSION AND RECOMMENDATIONS .................................. 110 6 Conclusion ............................................................................................................ 110 6.1 Managerial ownership: ................................................................................... 110 6.2 Institutional ownership ................................................................................... 111 6.3 Group businesses ............................................................................................ 111 6.4 Fixed Assets .................................................................................................... 111 6.5 Profitability ..................................................................................................... 112 6.6 Growth ............................................................................................................ 112 6.7 Information asymmetry .................................................................................. 112 6.8 Business Risk .................................................................................................. 113 6.9 Impact of Financial Performance ....................................................................... 113 6.9.1 Textile