Determinants of Corporate Financing Patterns and Their Impact on Corporate Financial Performance


For decades, factors affecting corporate financing patterns are being debated. It starts with the Miller and Modigliani (1958) theory of capital structure irrelevance. The theory passed through evolutionary process and researchers observed the behavior of corporate financing. Studies in late 1990s observed the role of corporate ownership structure in determining corporate financing pattern. However, literature provides no uniformity in determinants of financing patterns in different environments.

This study investigates factors affecting corporate financing patterns in various ownership structures in textile and sugar sectors of Pakistan. It also discovers the relationship between financing patterns and companies’ financial performance. It explores applicability of financing theories (trade off and pecking order) to the general situation in Pakistan, and in particular to the textile and sugar sectors.

Textile sector is by far the biggest slice of six hundred and fifty listed companies at Karachi Stock Exchange (KSE) and sugar sector is the second largest sector of Pakistan. Majority of these companies are family-owned, with controlling equity interest which leads to insider control and concentrated ownership. During 1995-2004, textile sector financial performance was poor (Shah, 2007). The empirical analysis pursued 108 listed companies from textile and thirty five companies from sugar sector of Pakistan for the period 2001-06.

Using Fixed Effect Model, the study concludes that group businesses, managerial ownership, institutional ownership, fixed assets business risk and profitability are statistically significant variables for both textile and sugar sectors of Pakistan. The analysis show negative relationship between debt financing and corporate financial performance in both the sectors. Major financing source for the textile and sugar sector is debt financing, particularly short term debt. Both the sectors depend on bank loan because the loan can be accessed at subsidized rate and political influence. This pattern of corporate finance reduced the incentive to mobilize capital through equity and public debt market. Partial support has been found for tradeoff theory in the textile sector of Pakistan. Sugar sector has partial support for pecking order theory.

Securities and Exchange Commission of Pakistan (SECP) should take measures to strengthen the capital market for debt in order to attract the corporate sector to be listed and traded actively. Measure should be taken to provide confidence to the investors and frequent market crashes should be avoided. This will provide more opportunities to the corporate sectors for financing businesses instead of relying only on the financial institutions.

Instead of prevailing numerous debt recovery laws used for different motives, a comprehensive bankruptcy law should be framed that could protect the rights of debtor as well as creditors. The policies are needed that help to strengthen the institutions. No political influence could be able to get undeserved financing on non professional basis.

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