KINNAIRD COLLEGE FOR WOMEN

POST- MID ASSIGNMENT 2

Article Review

COURSE TITLE: Corporate Finance

SUBMITTED TO: Ma’am Anam Tariq

SUBMITTED BY: Aqsa Waseem and Menal Sarfraz
MAJOR: BBA (Semester 6)
SECTION: A
DATE OF SUBMISSION: 28th June 2020
Article Review

Theories of capital structure invoke the best mixture of equities and liabilities and through
this managers can maximize their firm’s performance. Two theories have been discussed in this
article, the first one is trade off theory that "firms will choose their mix of debt and equity
financing to balance the costs and benefits of debt. The second theory is pecking order theory
where companies choose their financing strategy based on least resistance. Combination,
managers can maximize firm’s performance.

To examine the factors impacting decision inside Moroccan firm, information was gathered from
market data and accounting data, sample includes firms listed on the CSE, and the period spread
from 2009 to 2016. Accounting data is utilized to compute variables measuring growth
opportunity, tangibility, profitability, size and liabilities of firms. So the aggregate of sample
firms is 52 firms during eight years, which leave with 416 observations.

There were two variables explained; dependent variables and independent variables. Dependent
variable includes debt ratio, and independent variables includes return on asset (ROA), return on
equity (ROE), asset tangibility ratio (ATR), size, growth, liquidity, gross domestic product
(GDP), and interest loan rate (IS).

The article identifies the two main factors which can impact the capital structure. The first factor
is macroeconomics and the second one is the firm specifics. It has been identified that the he
macroeconomic factors have no impact on leverage level of firms. The variables that can affect
the firm’s debt decisions include return on asset, return on equity, asset tangibility, growth, size,
and liquidity. Size is the only factor that has a positive impact on debt decisions of a firm. Higher
return on asset ratio, return on equity and asset tangibility, will lead to better opt for less loan.
These three variables have a negative significant relationship.

Profitability and debt ratio in Holding companies have a significant positive relationship. As for
Material and software sector, the profitability and debt-equity ratio have a negative relationship.
Concerning Oil and gas sector, liquidity is an important factor in capital structure decisions. The
profitability of construction and building sector activity is affected negatively by debt. , the size
is the only factor which affects capital structure decisions. Therefore, larger enterprises need
more loans to finance the activity.