Indian Journal of Finance

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Capital Structure and Firm Efficiency: A Case of Pakistan


Affiliations
1 Research Scholar, Malaysia-Japan International Institute of Technology (MJIIT), Universiti Teknologi Malaysia (UTM), Malaysia
2 Research Scholar, COMSATS Institute of Information Technology Abbottabad, Pakistan
3 Senior Lecturer, Malaysia-Japan International Institute of Technology (MJIIT), Universiti Teknologi Malaysia (UTM), Malaysia
4 School of Business, The University of Notre Dame Australia (UNDA), Sydney, Australia

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This study investigated the effect of capital structure on firm performance using the agency cost hypothesis and reverse causality hypothesis. For the firms listed on the Karachi Stock Exchange under the textile industry, from 2008-2012, data envelopment analysis (DEA) was used to construct a frontier to measure firm efficiency. Efficiency risk hypothesis and franchise value hypothesis were tested to find out the effects between efficiency and leverage. The results suggested that ownership structure and leverage had a positive relationship (efficiency risk hypothesis) between them. The agency cost hypothesis supported the positive effect of leverage on efficiency. Convergence of interest, that is, concentrated ownership, had a positive effect on firm performance.

Keywords

Capital Structure, Ownership Structure, Leverage, DEA, Agency Cost, Firm Efficiency

D24, G3, G32, L6

Paper Submission Date: August 21, 2015 ; Paper sent back for Revision : October 5, 2015 ; Paper Acceptance Date : October 13, 2015.

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  • Capital Structure and Firm Efficiency: A Case of Pakistan

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Authors

Tahir Akhtar
Research Scholar, Malaysia-Japan International Institute of Technology (MJIIT), Universiti Teknologi Malaysia (UTM), Malaysia
Ahmad Zahir
Research Scholar, COMSATS Institute of Information Technology Abbottabad, Pakistan
Mohammad Ali Tareq
Senior Lecturer, Malaysia-Japan International Institute of Technology (MJIIT), Universiti Teknologi Malaysia (UTM), Malaysia
Fazle Rabbi
School of Business, The University of Notre Dame Australia (UNDA), Sydney, Australia

Abstract


This study investigated the effect of capital structure on firm performance using the agency cost hypothesis and reverse causality hypothesis. For the firms listed on the Karachi Stock Exchange under the textile industry, from 2008-2012, data envelopment analysis (DEA) was used to construct a frontier to measure firm efficiency. Efficiency risk hypothesis and franchise value hypothesis were tested to find out the effects between efficiency and leverage. The results suggested that ownership structure and leverage had a positive relationship (efficiency risk hypothesis) between them. The agency cost hypothesis supported the positive effect of leverage on efficiency. Convergence of interest, that is, concentrated ownership, had a positive effect on firm performance.

Keywords


Capital Structure, Ownership Structure, Leverage, DEA, Agency Cost, Firm Efficiency

D24, G3, G32, L6

Paper Submission Date: August 21, 2015 ; Paper sent back for Revision : October 5, 2015 ; Paper Acceptance Date : October 13, 2015.




DOI: https://doi.org/10.17010/ijf%2F2016%2Fv10i2%2F87243