The Impact of Capital Structure and Ownership Structure on Financial

Performance: A Study on the KSE-100 Listed Firms in the Pakistan Stock

Exchange.

By
Jamal Shah

A thesis submitted in partial fulfillment of the requirements for the degree of

Master of Sciences

Supervisor: Dr. Jameel Ahmed

Department/Centre/Institute: Institute of Management Sciences (IMS)

University of Balochistan
Session: 2018-2020
 II

Author’s Declaration

I ___Jamal Shah______________________ hereby state that my MS thesis titled

The Impact of Capital Structure and Ownership Structure on Financial
Performance: A Study on the KSE-100 Listed Firms in the Pakistan Stock
Exchange is my work and has not been submitted previously by me for taking any
degree from this University: UNIVERSITY OF BALOCHISTAN, QUETTA or
anywhere else in the country/world.
If my statement is incorrect, even after my Graduate, the university has the right to
withdraw my MS degree.

Name of Student
Jamal Shah

Date:
 III

Plagiarism Undertaking

I solemnly declare that research work presented in the thesis titled Impact The
Impact of Capital Structure and Ownership Structure on Financial
Performance: A Study on the KSE-100 Listed Firms in the Pakistan Stock
Exchange.
It is solely my research work with no significant contribution from others. Small
contribution/help wherever taken has been duly acknowledged, and I have written that
complete thesis.
I understand the zero-tolerance policy of the HEC and UNIVERSITY OF
BALOCHISTAN, QUETTA, towards plagiarism. Therefore, I, as an Author of the
above-titled thesis, declare that no portion of my thesis has been plagiarized and any
material used as reference is properly referred to/cited.
I undertake that if I am found guilty of any formal plagiarism in the above-titled thesis
even after awarding of MS degree and that HEC and the University have the right to
publish my name of the HEC/University Website on which names of students are
placed who submitted plagiarized thesis.

Student / Author Signature: ______________________

Name: _______________________________________
 IV

Certificate of Approval

This is to certify that the research work presented in this thesis, entitled The Impact of
Capital Structure and Ownership Structure on Financial Performance: A Study on the
KSE-100 Listed Firms in the Pakistan Stock Exchange was conducted by Mr. _Jamal
Shah_ under the supervision of ___ Dr. Jameel Ahmed.
No part of this thesis has been submitted anywhere else for any other degree. This
thesis is submitted to the __________________________________________
University of Balochistan, Quetta in partial fulfillment of the requirements for the
degree of Masters of science (MS) in Field of ___Management Sciences (Finance)_
Department of Institute of management sciences (IMS) UNIVERSITY OF
BALOCHISTAN, QUETTA.

Student Name: ____Jamal Shah____________ Signature _________________

Examination Committee:

a) External Examiner 1: Name Signature _________________

(Designation & Office Address)
_______________________________
_______________________________

b) External Examiner 2: Name Signature __________________

(Designation & Office Address)
_______________________________
_______________________________

a) Internal Examiner: Name Signature __________________

(Designation & Office Address)
_______________________________
_______________________________

Supervisor Name: Dr. Jameel Ahmed Signature ___________________

Name of Dean/HOB: Signature___________________

 V

Office of the Controller of Examinations

Notification
No.______________ Date_________________

It is notified for information of all concerned that Mr./Ms._ Jamal Shah_________

MS Scholar of Institute of Management Sciences (IMS) of UNIVERSITY OF
BALOCHISTAN, QUETTA has completed all the requirements for the award of
MS degree in the discipline Management Sciences (Finance) as per detail given
hereunder.
M.S in Management Sciences Cumulative Result

Registration Scholar’s Father’s Credit Hours Cumulative

No. Name Name Course Research Total Grade Point

Work Work Average CGPA

2004/UB- Jamal Muhammad

2018/Q-3444 Shah Ali

Research Topic:
The Impact of Capital Structure and Ownership Structure on Financial Performance:
A Study on the KSE-100 Listed Firms in the Pakistan Stock Exchange.
Local Supervisor-1 Name: ___Dr. Jameel Ahmed__________________________
Local Supervisor-1 Name:
___________________________________________________________________
Foreign/External Examiners:
a) Name:
____________________________________________________________________
University:
_________________________________________________________________
Address:
___________________________________________________________________
b) Name:
____________________________________________________________________
University:
_________________________________________________________________
Address:
___________________________________________________________________
Detail of Research Articles Published on the basis of Thesis research work:
The research paper was published in “Journal of Accounting and Finance in Emerging
Economies” ISSN: 2519-0318 & ISSN (E): 2518-8488, Volume 8: Issue 1 March,
2022, Pages: 213-226. www.publishing.globalcsrc.org/jafee
Note: this result is declaration as notice only: Errors and omissions, if any, are subject
to subsequent rectification.

Signed by
Controller of Examinations
 VI

Acknowledgement

Foremost, I would like to express my sincere gratitude to my research supervisor, Dr.

Jameel Ahmed and Mr. Nadir Khan, Assistant Professor Institute of Management

Sciences, University of Balochistan for the incessant maintenance of my entire MS

study and research work, for his persistence, motivation, enthusiasm, and enormous

knowledge. Their leadership assisted me in all the time of research and writing of my

thesis. I could not have illusory having a well advisor for my MS study, I would like

to thank the rest of my thesis supervisory committee: for their continuous inspiration,

perceptive remarks, and firm queries.

Jamal Shah.
 VII

Certificate from Supervisor & Co-Supervisor

It is to certify that the present research work entitled, titled “The Impact of Capital

Structure and Ownership Structure on Financial Performance: A Study on the

KSE-100 Listed Firms in the Pakistan Stock Exchange ” embodied in this thesis has

been carried out by Mr. Jamal Shah under my supervision and guidance in connection with

the fulfillment of the requirements for the degree of Master of Science (MS) in Institute of

Management Sciences. I hereby witness that the research work is original.

Dr. Jameel Ahmed

Date______________20 Research Supervisor
 VIII

Abstract

This research study aimed to examine the impact of capital structure and ownership
structure on the financial performance of KSE-100 index firms on the Pakistan Stock
Exchange. 100 listed companies have been selected as sample for the study but due to
data limitations, 90 companies' annual data has been used for 2009-2018. Ordinary
least square regression was used on the panel data for analysis. Two measures of
capital structure (debt-to-equity ratio and debt to total assets) while three measures of
ownership structure (Foreign ownership, Institutional ownership, and managerial
ownership) have been used to determine their impact on three financial performance
measures (return on assets, return on equity, and Tobin's).The results of this study
showed that there is a significant negative relationship between financial performance
and capital structure. Ownership structure and firm financial performance showed a
significant positive relationship when measured on the basis of foreign ownership and
institutional ownership while insignificant and negatively related to managerial
ownership. This study suggests that organizations should take financing decisions in
accordance with optimum capital structure because more debt decreases financial
performance. Furthermore, a decision should be taken the encouragement of foreign
and institutional shareholding, while the level of managerial ownership should be
lessened to enhance financial performance.

Keywords: Capital Structure, Ownership structure, Pakistan stock exchange,

Financial performance.
 IX

Table of Contents
Chapters Title Page No

Title Page

Author’s Declaration II

Plagiarism Undertaking III

Certificate of Approval IV

Controller Of Examinations V

Acknowledgement VI

Certificate from supervisor & Co-Supervisor VII

Abstract VIII

Table of Content IX

List of Tables XI

1 Introduction 1

1.1 Background of Study 1

1.2 Motivations and Purpose of Study 4

1.3 Problem Statement 6

1.4 Significance of Study 6

1.5 Objective- of Study 7

1.6 Limitations of Study 8

2 Literature Review 8

2.1 Capital Structure and Firm Financial Performance 8

2.1.1 Theoretical Perspective 8

2.1.2 Empirical Evidence 10

 X

2.1.3 In Pakistan Capital Structure and Firm Performance 13

2.2 Ownership Structure and Firm Financial Performance 15

2.2.1 Theoretical Perspective 15

2.2.2 Empirical Evidence 18

2.2.3 In Pakistan Ownership structure and Firm Performance 22

2.3 Research Hypothesis 23

2.4 Empirical Models 23

3 Research Methodology 24

3.1 Research Design 24

3.3 Data Collection and Variable of Study 24

3.3.1 Sampling 27

3.4 Research Analysis Tools 28

4 Results and Discussions 28

5 Conclusion and Recommendations 38

References 39
 XI

List of Tables

Page
Table No Particular
No

1 Table 4.1 Descriptive statistics 28

2 Table 4.2 Correlation Analysis 30

3 Table 4.3 Unit Root Test 32

4 Table 4.4 Hausman Test 33

5 Table 4.5.1 OLS Regression (Fixed Effect- ROA) 34

6 Table 4.5.2 OLS Regression (Random Effect- ROE) 35

7 Table 4.5.3 OLS Regression (Random Effect- Tob. Q) 36

 1

1.0 Introduction

1.1. Background of the study

Capital and ownership structure are significant elements that have potential to

influence companies performance (Berger & Patti, 2006). One of the important

decisions that must be taken by a manager is the decision relating to the arrangement

of the sources of funds to be undertaken by the firm, also called capital structure

decision. Financial structure presents the framework that defines the composition of

leverage and stock that are used to finances the organization activities to produce

optimal earnings for both shareholders and firm while taking into account the level of

risk (Dada & Ghazali, 2016).

Capital structure decision contain long and short term debt decisions along with

equity financing with the intention to achieve most favourable capital structure for

the organization. The capital structure decision are required when a company is newly

established or when the organization need expeditious funds for operations or new

projects. The chief financial officer or financial manager of a corporation is assessing

the advantages in addition shortcomings of different sources of funds before choosing

the best alternative while predicting the optimum capital mixture. The literature shows

that optimum capital structure is one that maximizes the organizations total market

value or minimizes the overall cost of investors (debtors and creditors). Therefore, the

capital structure decision is a continual and ongoing process and has to take by

management in order to fulfill cash flow requirements.

The debate concerning the conception of relation among capital structure and

company valuation was initiated by the paper “the cost of capital, corporate finance
 2

and the theory of investment” presented by (Modigliani & Miller, 1958), they

determined that firm valuation is not relevant to the capital structure, but this

supposition was locate on impractical assumption of perfect market competition.

It was proposed that organizations amend their capital structure according to their

goals rapidly when possessing good macro-economic circumstances (Cook & Tang,

2010). Therefore, it was examined capital structure decisions have investigated to

conclude its effects on the company’s valuation (Pandey, 2004). The study

determined the shareholder’s return on the basis of leverage in the Indian cement

industry and found that the firm valuation does not influence by financial leverage

(Bhayani, 2009). After summarizing many studies, it was suggested that factors

affecting capital structure depends on variables including tangibility, tax shields on

depreciation, progress forecasts, size, external threats, advertising etc. (Harris &

Raviv, 1991; Rajan & Zingales, 1995).

It is reality that larger investors could have substantial position to influence the

organization performance and they affects through methods, processes and actions

taken by management as per their needs and wants. The financial performance of

companies also relies on the financing decisions held by the executives and managers.

Therefore, structure of ownership besides capital structure dominantly affects

company financial performance.

The association among ownership structure and organizational valuation was

introduced and examined by (Berle & Means, 1932). They proposed that firms with

extensive distribution of shareholding tend to perform lesser than expected. Many

researchers identified that ownership concentration was positively effected on

company performance, while other studies show the confirmation of this link (Kanga
 3

& Shivdasani, 1995; Stulz, 1988; Short, 1994; Gedajlov & Shapir, 1998; Thomsen &

Pedersen, 2000; Gorton & Schmid, 2000). A concave model was established that

shows the connection between firm valuation and managerial ownership. Results

show that firm value rises when managerial ownership increases initially but it will

decreases as managerial ownership ranges a maximum level due to personal interests

(Stulz, 1988).

Global development of economic, commercial and financial relations made

organizations more proficient and experienced which directs them to the separation of

ownership from management. While this separation play a vital role in the

achievement of anticipated goals of owners, but the conflict of interest can generate

agency problems between management and owners. One of the measures for

assessment of agency problems is company’s performance (Margaritis & Psillaki,

2010).

Performance measurement is defined as the method of measuring efficacy besides

productivity of events and activities performed throughout the year (Neely, Gregory,

& Platts, 1995). It refers to the process of conversion of the sophisticated realities of

performance into organized symbols (Lebas, 1995).

Without measuring the results and outcomes it is difficult for the company to estimate

growth and stability. Therefore, organizational performance enhancement requires

some dimensions to identify the level an organization uses its resources that effects

business efficiency (Sharma & Gadenne, 2002). For effective supervision and

controlling of firm’s operations, performance measurements play a significant role

(Demirbag, Tatoglu, Tekinkus, & Zaim, 2006).

 4

Firm performance providing information to investors either debt or equity holders as a

basis for consideration in investment activities. There are two approaches in research

that measures firm financial performance, that is accounting and market based

measures (Al-Matari, Kaid, & Bt Fadzil, 2014).

1.2. Motivations & Purpose of study

The motivation for this research is the limitations of empirical examination regarding

the simultaneous impact of ownership and capital structure on company’s

performance. In addition, it focuses on the separate impacts of ownership and capital

structure on financial performance in economically growing nations, particularly in

the perspective of Pakistani quoted firms. Despite the fact that numerous studies have

determined diversified angles of ownership structure and capital structure but still

certain limitations exists.

Firstly, In Pakistan mostly researchers determine the separate connection concerning

ownership and capital structure with firm financial performance. Some researchers

worked on capital structure while others studied ownership structure. This study

focused on the simultaneous influence of ownership structure and capital structure on

organizations financial performance (Chaganti & Damanpour, 1991; Shyu, 2013;

Ukaegbu, Oino, & Dada, 2014; Ali, Shah, & Jan, 2015).

Secondly, the literature shows that researchers when determined the effect of

ownership structure with company performance, repeatedly emphases on

shareholding concentration, directors and institutional shareholding (Berger, Ofek, &

Yermack, 1997; Chen, Cheung, Stouraitis, & Wong, 2005; Cho, 1998; Chu, 2011;

Hasan & Butt , 2009; Wahla, Shah, & Hussain , 2012; Yasser & Mamun, 2015).

Empirically, the influence of foreign ownership on financial performance have

examined by a few number of researchers (Zou & Xiao, 2006; Gurunlu & Gursoy,
 5

2010; Huang, Lin, & Huang, 2011),while no single study found in Pakistan examining

the effect of foreign ownership on financial performance.

Due to severe growth in foreign investment, foreign ownership in recent times began

to play a vital role in developing countries (World Bank, 2011). According to

Pakistan stock exchange (PSX), number of shares held by foreign investors increasing

day by day. On 1st January, 2019 foreign ownership shows 10.81% of total shares

outstanding which increased to 15.12% by 3rd Dec, 2019.

Thirdly, many studies in literature has determined the influence of ownership

framework on organization performance while limited research describes the

association concerning structure of ownership and capital structure (Irwin Friend &

Lang, 1988; Brailsford, Oliver , & Pua, 2002; Li, Yue, & Zhao, 2009). Previously

researchers studied the linkage between shareholding structure and structure of capital

to find the factors which influence capital structure. Many Scholars including

(Brailsford, Oliver , & Pua, 2002; Jiraporn & Liu, 2007; Driffield, Mahambare, & Pal,

2007) proclaimed that further research and extensive examination of this relationship

will offer significant awareness about financing sources as well as capital structure

decisions.

Fourthly, many researchers considered capital structure, but not any single study

clearly deduces the influence of capital structure on company’s financial performance.

Contradictory results found when this relationship was empirically analyzed by

scholars. Additionally, literature shows that mostly research were conducted

concerning capital structure has focused only on debt portion of capital structure

along with determinants (Huang & Song, 2006). It was claimed that influence of

capital structure on performance in literature indicates deficiency of empirical proof,

especially in developing nations (Zeitun & Tian, 2007; Abor, 2007). The mentioned
 6

limitations stimulate new investigations on the association between capital structure,

ownership structure and financial performance.

Additionally, some other limitations in literature with regard to ownership and

capitalization structure on company performance in Pakistan. First, most of the earlier

research shows the relation of capital along with shareholding structure and

performance in specific sectors like cement industry, textile sector, financial firms or

non-financial firms etc. this research will evaluate the relationship with respect to all

listed companies on KSE-100 index. Second, in Pakistan most of the researchers used

the financial data for only five years for the examination of this linkage. This study

will use data of organization for 10 years to show better results. These all limitations

demonstrate the necessity for additional research to be conducted in Pakistan.

1.3. Problem statement

To find out the impact of ownership structure and capital structure on the financial

performance of companies listed on the KSE100-Index of the Pakistan Stock

Exchange (PSE).

1.4. Significance of the study

 This study will assist the listed organizations in Pakistan stock exchange

that how financing decisions are effected by different categories of owners

so that they establish and reshape the ownership structures.

 The outcomes of this study will be supportive to all stockholders as well as

stakeholders (creditors, investors, government, employees, suppliers,

companies, and managers etc.) that how performance is effected by the

owners and selection of financing mode, so that they make decisions about

their future investments.

 7

 It can also be used by listed companies on Pakistan stock exchange to

make productive apportionment of resources and choosing an optimum

capital structure to maximize shareholders wealth, company’s performance

and improvement of firm growth.

 Maximization of stockholders wealth is the key objective of business, this

study guides the board of directors and managers to take decisions for the

achievement of such objectives.

 Good ownership structure provides the manager with appropriate and

adequate authority to discharge their duties in the company management.

 This research provides instrumental information and important insights

regarding ownership structure, capital structure and financial performance

to researchers for future work.

1.5. Objectives of the study

1) To determine the impact of Ownership Structure on Financial Performance of

firms listed on the KSE 100 Index of the PSX.

2) To determine the impact of Capital Structure on Financial Performance on the

KSE 100 Index of the PSX.

1.6. Limitations of the study

The obstacles of the study may include the selection of sample. 100 listed companies

was choosen as sample for the study but due to data limitations, 10 companies have

been eliminated and 90 companies' annual data have used for analysis. Secondly, four

variables were selected for the examination of ownership structure i.e., Managerial,

institutional, foreign and state ownership but state ownership was also excluded from
 8

study because only thirteen listed firms having state ownership in their share holding

pattern.

2. Literature Review

Both capital structure and ownership structure having impact on business

performance. The relation among capital structure and company value is described by

efficiency risk hypothesis. Efficiency risk hypothesis stated that better performance

companies might use debt funding to avoid changes in structure of shareholders (King

& Santor, 2008).

2.1. Capital structure and firm financial performance

Capital structure is regarded as one of the most essential factors in firm financing

policy because of its very important role in firm performance (Gambo, Ahmad, &

Ahmad, 2016).

2.1.1 Theoretical perspective

The capital structure is considered as a noteworthy, challenging and a crucial issue in

the literature business finance. The seminal work of (Modigliani & Miller, 1958)

suggested that capital structure is not relevant to the firm valuation without

considering tax effect and perfect market assumption give a path to researchers for the

establishment of theories for the relation of capital structure with valuation of

organization.

Previously Scholars distributed the signaling effect of the capital structure theory into

two dimensions. Firstly, interpreted as a higher degree of leverage as a negative signal

concerning the forward-looking, therefore shows a negative impact on efficiency. The

other suggests that for future performance of firms raising leverage is a healthy signal.
 9

Thus the organizations who convincing the risk of increasing leverage indicates their

confidence in future operating activities even at a greater bankruptcy costs

(Greenwald, Stiglitz , & Weiss, 1984).

It was investigated that higher leverage leads competing organizations being more

aggressive while making investment decisions (Brander & Lewis, 1986). Research

claimed that companies were looking forward a price rise in advance to share issue

and debt rating afore debt proceeds (Graham & Harvey, 2001).

After analysis a non-linear linkage was found between managerial shareholding and

debt. At lower level of managerial shareholding agency problem decreases which

results in higher debt. Conversely, when management grasp a substantial portion of

companies’ equity, rise in managerial shareholding may induce managers to take

advantage and therefore may results in lower debt (Brailsford, Oliver , & Pua, 2002).

The study was conducted to effects the factors identifying capital structure of quoted

companies on Nepal Stock Exchange. Utilizing cross-sectional analysis, results show

that factors including earning rate, competition, growth rate and size was significantly

influencing the capital structure choices (Baral, 2004).

It was concluded that financial structure has significant consequences on company

valuation as well as on its cost of capital. Poor decisions regarding capital structure

leading the firms to higher cost of return which results in lowering. The firm net

present value of investment projects (Firer, Ross, Westerfield, & Jordan, 2008).

Research performed to examine the elements influencing the firm capital structure.

Results found that profit, physicality, magnitude and development was significantly

effected on financial decisions while tax shield of unlevered firms shows no impact

on financial structure chaises (Deari & Deari, 2009). Results evidenced that capital
 10

structure and profitability variables show strong one-to-one relationship where

financial structure was significantly influenced on the firm’s profit (Azhagaiah &

Gavoury, 2011).

The organizations have to maintain the mixture of equity and debt but the problem

arises whether the selected proportion of debt and equity give more benefits than the

costs. This problem must be answered before taking financing decisions because

different financial sources results in different benefit and cost, the same question

arises with various categories of debt instruments (Khan, 2012).

The relation of capital structure with financial performance was explored in India.

Outcomes of the study determined out that macroeconomic progression significantly

affect a capital structure choice that leads to affect the performance (Bandyopadhyay

& Barua, 2016).

2.1.2 Empirical evidence:

Conducted research and found that leverage ratios and equity ratios shows an adverse

relationship (Krishnan & Moyer, 1997). Similarly, it was examined that financial

structure was negatively related to business performance (Majumdar & Chhibber,

1999).

An investigation was made to identify impact of capital structure on corporation’s

performance in European countries and analyzed a significant negative impact

between the two, when evaluated by return on assets and net profit ratio (Gleason,

Mathur, & Mathur, 2000). On the opposite, study shows that firms’ efficiency was

positively relating to capital structure. They also stated that in case of high level of

profitability mostly organizations use a high level of debt (Hadlock & James, 2002).
 11

After application of correlation as well as regression analysis to measure the relation

of structure of capital and organizational performance on companies listed in Ghana

Stock Exchange, It was determined that performance was significantly and positively

effecting due to leverage (Abor, 2005). In contrast found a negative relation of

financial structure on performance when studied Chinese organizations (Huang &

Song, 2006).

Research investigated an inverse association among financial structure with business

profits (Ghosh, 2007). Analysis resulted that capital structure has positive impact on

financial performance and using higher level of leverage leading organizations

towards better performance (Margaritis & Psillaki, 2007).

Study conducted in Jordan by utilizing profit on assets and Tobin’s formula for

measuring organizations performance and resulted that financial structure shows a

substantial adverse impact on the company performance (Zeitun & Tian, 2007). The

relation of capital structure on organizational performance was determined on 64

Egyptian companies for the period of 1997 to 2005. He found that financial structure

shows no impact on company performance (Ebaid, 2009).

Researchers examined capital structure indicated positive relation on company

performance at a moderate level of leverage. Research conducted on 77 listed

organization on Dhaka Stock Exchange and resulted financial structure significantly

effects business performance as well as shows a strong positive correlation

(Chowdhury & Chowdhury , 2010).

After using data of 320 quoted companies on Tehran Stock Exchange for 2002-2009,

found no significant impact of capital structure on business performance (Saeedi &

Mahmoodi, 2011).The study measured the linkage between capital structure and firm
 12

performance. Results determined that capital framework has substantial positively

effect on company performance by using debt and profit ratios (Gill, Biger, & Mathur,

2011). While examined a significant negative effect of financial structure on

performance (Shubita & alsawalhah, 2012).

When analysis was applied on the records of 237 corporations quoted in the Bursa

Malaysian Stock Exchange, over the period of 1995 to 2011 resulted that debt shows

negative relation to profitability but growth indicated positive linkage with

performance (Salima & Yadav, 2012).

It was determined that leverage was positively related to business profitability (Goyal,

2013). By analyzing the data of trading organizations in Sri Lanka from 2006 to 2010,

outcomes of the study show indicated capital structure has significant effect on

corporate performance (Nirajini & Priya, 2013).

The studies conducted to measure relation between structure of capital and financial

performance and resulted significant and negative relation among leverage and firm

performance (Pouraghajan & Malekian, 2012; Olokoyo, 2013; Mireku, Mensah, &

Ogoe , 2014).

Research was conducted on Nigerian firms and found that profitability and leverage

was negatively related to each other (Oino & Ukaegbu, 2015). On contrast, business

performance and capital structure shows a positive relationship (Adhari & D., 2015).

The study measured the impact of business debt on financial performance on 10

leading oil and gas companies in Canada from 2004 to 2013. Results showed strongly

negative influence of business debt on company performance (Hossain & Nguyen,

2016).
 13

Analysis was made on the data of Vietnamese companies for 2007-2012 for

investigation of relation between capital framework and company performance. The

results of the study show strongly significant negative relation among firm

performance and all leverage measures (Le & Phan, 2017).

The goals of the research were to evaluate the influence of financial structure on

organizational performance. Findings show a significant non-monotonic relation, i.e.

positive at lower debts but negative at higher debt levels. Therefore it was determined

that healthier firms apportion lesser leverage on financial structure (Kharabsheh, AL-

Gharaibeh, & Zurigat, 2017).

2.1.3. In Pakistan capital structure and firm performance:

The effect of capital structure on organizational profitability was investigated on 94

quoted companies in the Islamabad Stock Exchange (ISE) from 1999-2004. The study

used regression analysis besides with Pearson’s correlation. It was found that financial

structure significantly impacts firm profitability (Raheman, Zulfiqar , & Mustafa,

2007).

Research was carried out toward determining the influence of firm performance on

leverage and indicated that company debt was not affecting the performance of banks

(Siddiqui & Shoaib, 2011). After analysis it was found that company’s performance

and leverage was significantly but negatively related (Amjed, 2011).

Analysis was performed on the engineering sector of Pakistan and revealed that

company debt and business performance shows a significant negative relation when

measured by Tobin’s Q and ROA (Khan, 2012).

 14

The research investigated that the financial structure was negatively interrelated to the

accounting measures of performance (Memon, Bhutto, & Abbas, 2012).

Leverage and firm performance shows negative correlation when investigated (Sheikh

& Wang, 2013). Research was conducted on factors of company financial

performance on records relating to textile sector of Pakistan. Results concluded that

firm performance was significantly influenced by variables including short term debt,

magnitude, threats, and non-debt tax benefits (Abbas, Bashir, Manzoor, & Akram,

2013).

The research was performed to examine the impact of capital structure on the

company performance as well as on shareholders wealth in Pakistan. After application

of regression analysis results found that the financial structure was positively affects

both the firm’s performance besides stockholders wealth (Mujahid & Akhtar, 2014).

Quantitative statistics was together from annual statements of 49 listed firms from

food sector in Pakistan for 2007-2012 to determine the relation among financial

structure and business performance. Results found that financial structure was

significantly adverse effect on all performance measures (Khanam, Nasreen, &

Pirzada , 2014).

The relation of capital structure with financial performance was examined on quoted

companies from 6 sectors in Pakistan. Results found that business performance have

significant relationship with financial structure (Basit & Hassan, 2017).

Research was conducted on 213 non-financial companies quoted on the Karachi Stock

Exchange (KSE) to measure the influence between structures of capital with financial

performance. Major sectors indicate significant negative influence of current and non-

current debt on financial performance (Kanwal, Shahzad, Rehman, & Zakaria, 2017).
 15

The motive of the study was to examine how corporate governance and financial

structure affects business performance. They used Panel pooled regression method on

annual data of automobile & fertilizers sectors. Results indicated a negative effect was

found among capital structure and business performance in both sectors (Ahmed,

Talreja, & Kashif, 2018).

2.2. Ownership structure and firm financial performance

The relation among organizational value and the structure of equity ownership is a

subject matter of most researchers in the literature of finance. As the financial

performance of an organization depends on the decisions of shareholders, therefore

different categories of stockholders was previously studied in literature.

2.2.1 Theoretical perspective

Scholars begin to study the effect of ownership structure on financial performance

turning backwards in 1968 (Kamerschen, 1968; Monsen, Chiu, & Cooley, 1968) .

Participations by other researchers on this relation include (Jensen & Meckling, 1976;

Williamson, 1988; Hart, 1995), which leads towards the theory of separation between

stockholders and management.

Analysis were made and examined that the expansion in managerial ownership will

leads to strengthen the managers, which means that the managers influence on

business performance will increases and there is reduction in stockholders authority

on company’s financial performance (Fama & Jensen, 1983). Researchers also stated

that the encroachment of management will be decreases as the institutional ownership

increases (McConnell & Servaes, 1990).

The study established a model which describes that as probability of a successful

acquisition increases, the outside shareholders can deliver productive monitoring of

 16

managerial performance. The established model forecasts that the presence of an

outside stockholder increases firm valuation (Shleifer & Vishny, 1986). Researchers

examined the interaction between managerial ownership and product market

competition. They presented that with high substitutability of productivity, allowing

managers an extensive risk which leads them towards more aggressiveness

(Fershtman & Judd, 1987).

It was determined that the successful execution of satisfactory corporate governance

cannot be disconnected from the company’s ownership framework. Therefore, to

carry out good corporate governance, the ownership structure is deemed very essential

in explaining the agency problem, because good ownership system delegates the

management to have proper and adequate authority to discharge their responsibilities

in the company (Oman, 2001).

The study examined the linkage between changes in firm value and ownership

framework was took place due to non-control targeted repurchases of common stock

and found that declarations of repurchases from company owners and announcements

of repurchases from management are related significantly with rise in firm valuation

(Chang & Hertzel, 2004). The connection among shareholding structure and financial

performance give significant consideration in literature of finance (Jiang, 2004).

Results indicated in Indonesia foreign institutional ownership have significant

negatively influence on liquidity (Rhee & Wang, 2009). Analysis was made on

publicly traded banking companies to evaluate relation between the level and stability

of institutional ownership, riskiness and diversification. Results show that institutional

ownership have higher and steady link with higher level of revenue, geographic area,

and nontraditional banking and proposing that institutional investors are careful and
 17

prioritize diversification strategies that leads to risk-reduction (Deng, Elyasiani, & Jia,

2013).

The study concentrates the link of corporate governance with shareholding of

companies in Pakistan. The results show that reduction in ownership and control

problems can take place through effective and efficient corporate governance in the

organizations (Hassan & Marimuthu, 2015).

While examining the linkage of institutional ownership with firm’s information and

trading environments, results explored that higher institutional ownership is related

with greater management exposure (Boonea & White, 2015).

Investigations found that higher degree of institutional shareholding directs

organizations to pay more dividends. Analysis results in a one-percentage-point rise in

institutional shareholding effects to rise in dividends by (8%). The relationship among

institutional ownership and dividends is stronger for firms showing high agency costs

(Crane, Michenaud, & Weston, 2016).

Research was carried out in Pakistan to inspect the relation among ownership

structure, excess control and business governance on financial performance of

companies. The outcomes indicated that one of the dominant factor that affecting firm

performance is ownership structure (Ullah, Ali, & Mehmood, 2017).

After analysis it was found that foreign ownership lead companies to use short-term

opportunities and forgo long-term investment. They also investigated that foreign

institutional shareholding also results in significant growth and rises in innovation

output (Bena, Ferreira, Matos, & Pires, 2017).

The study was conducted on Chinese firms to investigate the relation among

government ownership and financial debt. It was revealed that most of Chinese listed
 18

firms considerably uses more short term leverage as compare to long term leverage. It

was also examined that when the number of stockholders rises, lesser debt is usually

favored (Wang, Manry , & Rosa, 2018).

Analyses were made in Saudi Arabia to measure the role of company regulators on

business performance. The study used institutional, government, foreign ownership

for shareholding structure. It was resulted that foreign ownership indicate minimum

significance while ownership concentration show positively relationship on company

performance (Alawi, 2019).

2.2.2 Empirical evidence:

The influence of ownership structure on organizations financial performance is

significant while making decisions regarding financing and investment decisions.

Researchers studied this relationship over a period of time but results indicate

inconsistent research findings.

Empirically it was found that there was a positive relation between firm value and

institutional ownership (Leech & Leahy, 1991; Xu & Wang, 1999). In contrast,

reaches determined that financial performance and domestic institutional ownership

have no significant relation (Agrawal & Knoeber, 1996; Porta, Lopez‐De‐Silanes , &

Shleifer, 1999; Bolbola, Fatheldin, & Omran, 2005).

During analysis the relation among organizational performance with equity holders

was examined, result show a significant curved relation among performance and

inside shareholders. They also investigate a significant positively relation among

performance and institutional stockholders (McConnell & Servaes, 1990) .

Results indicated a positive influence among ownership concentration and business

performance on Chinese listed firms, in addition significant results for large

 19

institutional stockholders and inefficient result about state ownership (Xu & Wang,

1999).

Research found that structure of shareholders indicated no systematic relationship on

organizational performance that was anticipated. They have treated shareholding as

endogenous variable. It was found that ownership structure was insignificant in

clarifying the company performance (Demsetz & Villalonga, 2001).

The study performed to examine the impact of shareholders framework on company

valuation. They analyzed the data of 8 East Asian countries throughout the period of

financial disasters. Results show that due to crises the firm investments was

negatively affected which caused in raising the probability that the controlling

shareholders take away the smaller stockholders (Lemmon & Lins, 2003).

Several tests were performed to investigate that whether foreign organizations

increases long term investments, level of employment, and modernization of output

through supervision. The study resulted in that long-term foreign institutional

shareholding shows significant positive relationship with firm performance as

compare to short-term foreign institutional ownership (Gaspar, Massa, & Matos,

2005).

Research was carried out in UAE to examine the association amid shareholders

structure and financial performance. Outcomes show that government shareholding

was positively related with performance while institutional shareholding shows no

relation with business performance (Aljifri & Moustafa, 2007).

The impact of ownership structure with performance was analyzed on non-financial

corporations in New Zealand. The companies were smaller in size with high
 20

institutional investor ownership. They found a positive effect of performance on

institutional shareholding (Chen, Blenman, & Chen, 2008).

Research was carried out and found ownership concentration in terms of top

shareholder shows a negative while five major shareholders shows positive effect on

business performance. In addition it was also determined that institutional ownership,

individual shareholding and managerial shareholding show negative effect on

organizational performance (Alipour & Amjadi, 2011).

Managerial and family ownership relates significantly to corporate performance while

using regression analysis. Results show that firm performance decreases when the

managerial ownership increases (Amran & Ahmad, 2013).

The study performed to investigate the role of capital requirements on public and

private companies by analyzing capital requirements with concentration, government

and foreign ownership structures (Al-Matari, Al-Matari, & Saif, 2017). The impact of

overseas institutional shareholding on shares liquidity was studied. Results found that

higher foreign institutional contribution show positive effect on stock liquidity (Ding,

Nilsson, & Suardi , 2017).

The results of the study show that countries having greater government ownership in

banking companies along with high fraud in banks regarding loan facilities indicates

significantly positive relation among state shareholding and bank debt financing

(Boubakri & Saffar, 2017).

Research was conducted to investigate the performance of US corporations which

were acquired by foreigners (McGuinness, Vieito , & Wang, 2017). It was found that

multinational enterprises shows better performance than local companies and results

indicates that foreign ownership was significantly and positively influenced by

 21

company performance (Chen, Ghoul, Guedhami, & Wange, 2017). After analyses

examine that foreign ownership was positively related to business performance

because foreigners use suitable corporate governance in the management of

organizations internal system (Wang & Shailer, 2017).

Results revealed that corporate and foreign ownership show a significant and positive

relation. Moreover, foreign stockholders can offer accessibility to substantial

resources and management coordination. Many organizations show strong company

governance system in comparison to resident firms because of foreign ownership that

result in higher performance for outside owned companies (Zraiq & Fadzil , 2018).

An institutional shareholder decreases the agency costs due to the close monitoring

and supervision of the performance. Results discover a positive correlation among

company financial performance with institutional ownership. The research presumed

that company’s having high institutional ownership can perform better than others in

the industry (Yahaya & Lawal, 2018). Research was conducted to examine the

influence of state ownership on company’s cash policy. The findings of the indicated

that corporate cash holdings and state ownership was positively related to each other

(Chen, Ghoul, Guedhami, Kwok, & Nash, 2019).

2.2.3. In Pakistan ownership structure and firm performance:

Research was conducted to determine ownership structure and external financing for

companies on the Karachi stock market for 2003-2008. The outcomes of research

proposed that companies using more equity financing run through good governance

while firms that are large in size and high growth needs more external financing.

(Javid & Iqbal, 2008).

 22

The study investigated the impact regarding ownership structure on financing

decisions by utilizing managerial and institutional stockholders. They also measured

influencing firm size and profits on firms’ funding decisions. Results show that firm

performance and size was significantly affected on capital structure (Hasan & Butt,

2009).

Managerial and concentrated ownership were used to represent stockholders

ownership and examined a significant negative relation among managerial ownership

and performance while financial performance indicated insignificant relation with

concentrated shareholding. In addition, also examined that debt has significant

negatively effect on company performance (Wahla, Shah, & Hussain, 2012).

The purpose of research was to find relation of performance concentrated ownership

in Pakistan. Results suggested that profitability shows negative affect on higher

concentrated ownership (Yasser & Al Mamun, 2015).

An analysis was made to investigate the influence of ownership structure on

organizational financial performance. Results indicated the performance measures and

shareholders structure has significant relationship, while insignificant relationship was

found when accounting-based performance measure (Ali, Shah, & Jan, 2015).

The impact of corporate governance was determined to view the shareholding and

control of companies in Pakistan. It was proposed that problems regarding control and

ownership in firms can be reduce through effective corporate governance mechanism

and the principle agent problem can be mitigated by defining strong company policies

and objectives (Hassan & Marimuthu, 2015).

The study examined that company shareholding is a dominant aspect that affects

performance in Pakistan. After analysis it was explored that firm performance was
 23

negatively linked to both inside ownership and ownership concentration while

Institutional shareholding was positively related towards performance (Ullah, Ali, &

Mehmood, 2017).

The effect of institutional stockholders on organizational performance was

investigated by using data of non-financial companies in Pakistan from 2007-2011. It

was resulted that financial performance show significantly negative relation with debt

and institutional ownership (Ahmad, Baek, Kim, & Shah, 2019).

2.3 Hypothesis

 H1: There will be a significant positive relationship between ownership

structure and financial performance of the firms listed on the KSE 100 Index

of the Pakistan Stock Exchange.

 H2: There will be a significant positive relationship between capital structure

and financial performance of the firms listed on the KSE 100 Index of the

Pakistan Stock Exchange.

2.4 Empirical Models

Model 1: Return on assets (ROA) will be utilized as a representative for financial

performance with managerial, institutional and foreign ownership for ownership

structure, and debt equity ratio and total debt total assets for capital structure. It

delivers a practical proof of the firm’s performance because it indicates the

proficiency of total assets in producing profits.

ROAit = β0 + β1DTEit + β2DTTAit + β3MOit + β4IOit + β5FOit + εt

Model 2: Return on equity (ROE) will be utilized as a representative for financial

performance with managerial, institutional and foreign ownership for ownership

structure, and debt equity ratio and total debt total assets for capital structure. It shows
 24

the profits a company is giving to its equity stockholders on their investment. ROEit =

β0 + β1DTEit + β2DTTAit + β3MOit + β4IOit + β5FOit + εt

Model 3: Tobin’s Q formula (Tob. Q) Utilized as a representative for financial

performance with managerial, institutional and foreign ownership for ownership

structure, and debt equity ratio and total debt total assets for capital structure. It results

in estimating the forthcoming long-term performance.

Tobin’s. Qit = β0 + β1DTEit + β2DTTAit + β3MOit + β4IOit + β5FOit + εt

3. Research Methodology

3.1. Research Design

This is a quantitative study. The study used numerical data from annual financial

statements of organizations.

3.2. Data collection and variables of the study

This study used secondary annual data of Pakistani listed firms from 2009 to 2018.

The data for analysis was gathered from the annual financial reports of the firms

( from the website of Pakistan Stock Exchange and individual websites of

companies).

Independent Variables:
In this research, the independent variables are the ownership structure and capital

structure of the organizations listed on the Pakistan Stock Exchange (PSX), which is

divided as follows:

Capital structure:
Capital structure is a blend of debt and equity investments maintained by a company

to finance its assets, specially relates to the long-term expenditures (Margaritis &
 25

Psillaki, Capital structure, equity ownership and firm performance, 2010). Capital

structure defining the method an organization practices to finance its

properties/projects, by choosing mixture of debt, equity or hybrid securities (Saad,

2010).

This research will study the capital structure measures as debt to equity ratio and debt

to total assets to analyze the effect on financial performance.

 Debt to equity ratio represented by dividing total debts with shareholders capital.

 Debt to total assets shows the total debts dividing by total assets.

Ownership structure:
Ownership structure is defined as the structure that shows investments made by inside

investors like directors, managers and other employees as well as investments by

outside investors including debt and equity holders (Jensen & Meckling, 1976).

The study defines ownership structure is the group of investors/owners that indicates

the combination of persons, groups and organizations whose investment portfolios,

interests and objectives and goals are different from one another (Bansal, 2005).

Ownership structure was defined as the quantity of shares held by managers,

executives, institutes, government and overseas stockholders, and household etc.

(Ezeoha & Okafor, 2010).

Due to scope and data collection limitations this research will focuses on managerial,

state, foreign and institutional ownership as independent variables.

 Managerial Ownership is defined as quantity of shares owned by managers,

directors, CEOs etc.

 Institutional ownership is expressed as quantity of shares owned by

institutions such as banks, leasing companies, associated firms etc.

 26

 Foreign Ownership means the quantity of shares owned by foreign

government, individuals or multinational organizations.

Dependent variable
The dependent variable in this study is the company’s financial performance

measured through accounting and market based Measurements.

Measurement of performance is important for organizations because it provides

substantial instrumental directions to check administration’s performance, report

progression, enhance communication plus motivation within firm, and helps in

identifying problems (Waggoner, Neely, & Kennerley, 1999).

Literature shows that the researchers have used different measures to examine firm

performance. Financial performance measurements are classified as accounting and

market based indicators. The accounting measures gauges efficiency through

profitability of companies. Accounting based indicators show the results of

management actions performed throughout the financial year, therefore these

measures favored over market measures (Hutchinson & Gul, 2004).

The market based measurement is considered best because these measures indicate

forward-looking features and it shows the prospects of the stockholders regarding the

upcoming performance of companies (Ganguli & Agrawal, 2009; Shan & McIver,

2011; Wahla, Shah, & Hussain , 2012). Tobin’s Q is well-liked by numerous financial

experts who have better knowledge of the market restrictions (Demsetz & Villalonga,

2001).

ROA is used 88 times and ROE 52 times by researchers when they evaluate

performance while Tobin’s Q formula utilizing 74 times by researchers when they

evaluate performance on the basis of market-based measurements (Al-Matari, Kaid, &

Bt Fadzil, 2014).
 27

Therefore this study will use ROA and ROE as accounting based measurements and

Tobin’s Q formula as market based measurement.

 Return on assets: so-called as return on capital employed, measures how a

company’s assets are producing returns for the corporation. It is elaborated by

dividing net profit and company’s total assets during the same financial year.

 Return on equity: measured as company’s earnings available to common

shareholders divided average shareholder’s equity.

 Tobin’s Q formulated by James Tobin in Yale University. It is measured by

dividing firm’s total market value with total asset.

3.3. Sampling

The population of the study is 553 companies listed on Pakistan stock exchange but

this study selected the data of KSE-100 index listed companies as sample for 10 years

from 2009 to 2018. Out of 100 listed companies, 10 companies were eliminated due to

unavailability of data. Therefore, 90 companies' annual data was used for the analysis.

3.4. Research Analysis Tools

Panel data regression model is used to find the effect of capital structure as well as

ownership structure on financial performance of firms listed at KSE-100 Index.

Correlation analysis is performed to investigate the nature of relationship between the

variables of study. Unit root test was applied to find the non-stationarity in data.

Hausman Test was performed to evaluate the fixed and random effect regression for

better results.

4. Results and discussion

4.1. Descriptive statistics

 28

Descriptive statistics is performed to examine the level of capital structure and

ownership structure that is used by the listed firms and find the financial performance

of companies.

Table 4.1: Descriptive Statistics

Independent Variables Dependent Variables

Measures DTE DTTA FO IO MO ROA ROE TQ

Observations 900 900 716 900 890 900 900 900

Mean 4.6583 0.6354 12.6235 55.0286 10.8164 6.7572 25.2307 1035.55

Median 1.6250 0.6100 4.9650 61.0050 0.5800 4.5650 17.8100 462.250

Max. 184.00 8.6700 84.700 100.000 89.640 46.950 701.400 2361.65

Min. 0.0060 0.0060 0.00004 0.00070 0.00006 -43.500 -270.00 0.2200

Std; Dev 11.343 0.5101 18.5520 28.7102 18.7829 9.1415 235.489 2019.04

Descriptive statistics results are shown in table 4.1. This table presented that the

average value of ROA is 6.75% which means that as a whole firm generating 6.75%

return by employing firm’s assets. The mean value of ROE is 25.23% which shows

the good performance of organizations and shows that on average firms on KSE-100

index are giving a good income to its shareholders. TQ ranges between 23616.5 and

0.2200 and it shows higher deviation from mean which is 2019.04. Higher Tobin’s Q

results in better operating performance, high growth potential and higher market
 29

value. Maximum value of ROE is 7014.00 and minimum value is -270.00 which

represents a large variation of ROE among the firms.

Capital structure is measured by two variables which are debt to equity (DTE) and

debt to total assets (DTTA) through 900 observations. The mean value of DTE ratio is

4.65 times against the shareholders equity while average value of DTTA is 63.5%

which means that organizations on KSE-100 index finance its 63% assets by using

long term debt. Among the two variables of capital structure, DTE shows higher

deviation of 11.34.

Foreign ownership (FO), institutional ownership (IO) and managerial ownership

(MO) are used to measure the ownership structure. IO account for a significant

proportion of 55.02% in the ownership structure of listed firms on KSE-100 Index,

whereas FO and MO are only about 12.62 % and 10.81% respectively. A prominent

point is that FO shows results very near to MO because FO takes place important role

in the ownership structure of the listed firms on Pakistan Stock Exchange. The

maximum of IO is higher than other ownerships i.e 100% compared with

approximately 85% of FO and 90% of MO.

4.2 Correlation Analysis:

Correlation analysis was used to determine the associations among all variables that

are used in regression model; either there is strong or weak and positive or negative

relationship.

Table 4.2: Correlation Analysis

Independent Variables Dependent Variables

 30

DTE DTTA FO IO MO ROA ROE T.Q

DTE 1.000

DTTA 0.333 1.000

FO -0.051 -0.190 1.000

IO -0.011 0.174 -0.394 1.000

MO -0.071 -0.068 -0.107 -0.541 1.000

ROA -0.210 -0.369 0.097 -0.028 0.021 1.000

ROE -0.017 0.009 -0.002 0.028 -0.020 0.058 1.000

T.Q -0.156 -0.346 0.173 -0.082 -0.025 0.410 0.026 1.000

Table 4.2 showed a negative relation between ROA, ROE and T.Q with DTE and

DTTA i.e., (-0.210), (-0.017), (-0.156), (-0.369) and (-0.346) respectively, while

positive and weak relation between ROE and DTTA i.e., (0.009). As more variables

show negative effect, therefore capital structure and financial performance have

negative relationship.

Correlations between financial performance and ownership structure measures

presented contradictory results. ROA have positive relationship FO and MO which is

(0.097) and (0.021), while negative relationship with IO which is (-0.0285). ROE was

positively related with IO (0.028) and negatively related with FO and MO. T.Q have

negative relation with IO and MO i.e., (-0.082) and (-0.025) while positive relation

with FO which is (0.173).

4.3 Test of Non-Stationarity

 31

Before using the ordinary least square regression model, non-stationarity test should

be performed on all variables under study to evaluate either the panel data is

stationary or not. Table 4.3 presents the outcomes of unit root test relating to all

dependent and independent variables below:

Table 4.3: Unit Root Test

Variable Method Statistics Prob.

ROA

-10.0562 0.0000

ROE

-19.2732 0.0000

Tobin’s Q

Null: Unit root(assumes common unit root process) -8.32518 0.0000

DTE Levin, Lin & Chu t*

-21.3517 0.0000

DTTA

-11.7287 0.0000

FO

-13.8083 0.0000

IO
 32

-8.83102 0.0000

MO

-12.9221 0.0000

According to table 4.3, the P-value of all test relating to variables are below the

acceptable level at 5%, therefore stationarity exists in data, so this variables can be

utilized for further analysis.

4.4 Hausman Test

Hausman test was applied on panel regression models to determine which panel

effects (between fixed and random) provide better results. Therefore, results of the

Hausman test for the three dependent variables are as follows.

Table 4.4: Hausman Test (Dependent Variables)

Return on Assets

Test summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section 11.642852 5 0.0400

Return on Equity

Test summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section 1.524993 5 0.9102

Tobin’s Q

Test summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

 33

Cross-section 9.209561 5 0.1010

When regression model run on random effect and applied Hausman test, Table 4.4

shows that the ‘p’ value for ROA is less than the acceptable level at 5% i.e., (0.0400)

it directs to use fixed effect regression model for the ROA as dependent variable.

While ‘p’ value for ROE and Tobin’s Q is greater than the acceptable level i.e.,

0.9102 and 0.1010 respectively that directs to use random effect regression model for

the ROE and Tobin’s Q.

4.5 Ordinary Least square Regression

To measure the impact of capital structure and ownership structure on financial

performance, this study applied ordinary least square regression for the examination

of panel data by using E-views 10 software.

Table 4.5.1: OLS Regression (Dependent variable- ROA)

Variable Coefficient Std. Error t-Statistic Prob.

C 5.957664 2.745647 2.169858 0.0304

DTE -0.032154 0.010261 -3.133527 0.0018

DTTA -6.009316 2.564129 -2.343609 0.0194

FO 0.117537 0.040423 2.907699 0.0038

IO 0.060188 0.022407 2.686109 0.0074

MO -0.047798 0.031741 -1.505860 0.1326

 34

The results of fixed effect regression model for dependent variable ROA are shown in

table 4.5.1. Results presented a negative relationship between capital structure and

firm financial performance on the basis of ROA. The coefficient value of both DTE

and DTTA is -0.032154 and -6.009316 respectively; this means that there is negative

relation of capital structure with ROA. The significant change in DTE is 0.0018 and

DTTA is 0.0194 which is less than the acceptable value of 0.05 so both shows

significant relation with firm financial performance. In this case our alternate

hypothesis is rejected.

Ownership structure represented a significant positive relationship on firm financial

performance when measure on the basis of FO and IO with ROA. The coefficient

value of is FO is 0.117537 and IO is 0.060188, this means that value shows positive

relation and the P-value of FO is 0.0038 while IO is 0.0074 which is less than the

acceptable value of 0.05, therefore having significant effect on ROA. it shows the

strong evidence to accept the alternate hypothesis. The outcome of the regression

model shows that firm financial performance is insignificant and negatively related

with ownership structure when measured on the basis of MO. The coefficient value of

managerial ownership is -0.047798 that means there is negative relationship between

the two. The significant change in managerial ownership is 0.1326 which is greater

than the acceptable value of 0.05, it is not significant and therefore we reject our

alternate hypothesis.

Table 4.5.2: OLS regression (Dependent variable- ROE)

Variable Coefficient Std. Error t-Statistic Prob.

C 9.453714 9.065316 1.042844 0.2974

DTE -0.434151 0.445131 -0.975333 0.3297

 35

DTTA 11.92141 18.60033 0.640924 0.5218

FO 0.107380 0.216462 0.496066 .0.6200

IO 0.236547 0.071170 3.323680 0.0009

MO -0.096595 0.301778 -0.320087 0.7490

According to table 4.5.2., there is a negative relationship between DTE and ROE

while positive relation among DTTA and ROE. The coefficient value of DTE and

DTTA are -0.434151 and 11.92141 respectively. The P-value of DTE is 0.3297 and

DTTA is 0.5218, both are greater than the acceptable value of 0.05 therefore showing

highly insignificant relationship with ROE.

Ownership structure indicated significant positive relationship on firm financial

performance when analyzed on the basis of FO and IO with ROE. The coefficient

value of is FO is 0.107380 and IO is 0.236547 that means both variables show

positive relation with financial performance. The P-value of FO is 0.6200 that shows

insignificant relation while institutional ownership is 0.0009 which is less than the

acceptable value of 0.05 therefore having significant effect on ROE. It shows the

strong evidence to accept the alternate hypothesis. The outcome of the regression

model shows that firm financial performance is insignificant and negatively related

with ownership structure when measured on the basis of MO and ROE. The

coefficient value of managerial ownership is -0.096595 that means there is negative

relationship between the two. The significant change in managerial ownership is

0.7490 which is greater than the acceptable value of 0.05, it is not highly insignificant

and therefore we reject our alternate hypothesis.

Table 4.5.3: OLS Regression (Dependent variable- T.Q)

 36

Variable Coefficient Std. Error t-Statistic Prob.

C 1331.427 299.2311 4.449494 0.0000

DTE -5.982914 1.876372 -3.188555 0.0015

DTTA -623.3876 200.7693 -3.104495 0.0020

FO 0.265387 4.126027 0.064320 0.9487

IO -0.361994 3.121615 -0.115964 0.9077

MO -2.672819 4.987972 -0.535853 0.5922

The results in table 4.5.3 indicated that there is a negative relation among capital

structure and firm financial performance on the basis of T.Q. The coefficient value of

both DTE and DTTA is -5.982914 and -623.23876 respectively; this means that there

is negative relation with financial performance. The significant change in DTE is

0.0015 and DTTA is 0.0020 which is less than the acceptable value of 0.05 so both

are highly significant. Therefore there is a significant negative relation among capital

structure and firms financial performance. In this case our alternate hypothesis is

rejected.

Ownership structure and firm financial performance presented insignificant negative

relation when measured on the basis of IO and MO with T.Q. The coefficient value of

IO is -0.361994 and MO is -2.672819, that means both variables of ownership

structure have negative relation with T.Q. The P-value of IO is 0.9077 while MO is

0.5922 which is much greater than the acceptable value, therefore having insignificant

effect on financial performance. These results show the strong evidence to reject the

alternate hypothesis. The outcome of the regression model shows that firm financial

performance is insignificant and positively related with ownership structure when

measured on the basis of FO and T.Q. The coefficient value of FO is 0.265387 that
 37

means there is positive relation between the two. The significant change in FO is

0.9487 which is much greater than the acceptable value of 0.05, it is highly

insignificant and therefore we reject our alternate hypothesis.

Using the panel data regression model along with correlation analysis, we found that

there is a significant negative relationship between capital structure and firm financial

performance which is consistent with earlier studies in Pakistan (Kanwal, Shahzad,

Rehman, & Zakaria, 2017; Ahmed, Talreja, & Kashif, 2018). Researchers determined

that Ownership structure and firm financial performance presented significant positive

relationship when measured on the basis of foreign FO and IO with ROA and ROE

while insignificant with T.Q. The results relating to IO is in accordance to the study of

(Ullah, Ali, & Mehmood, 2017), while showed opposite results with the research of

(Ahmad, Baek, Kim, & Shah, 2019) in Pakistan. The impact of FO on financial

performance is traced first time on the listed firms in Pakistan, and shows significant

positive relationship on financial performance which supports the hypothesis of this

study as well as consistent with the results of (Shrivastav & Kalsie, 2017). Finally, we

observed that MO shows negative and insignificant relation with financial

performance (ROA) which is consistent with the results of (Wahla, Shah, & Hussain,

2012).

5. Conclusion and recommendations:

The authors have examined the relationship between capital structure and ownership

structure on companies’ financial performance on a sample of 90 listed firms on KSE-

100 index on PSX for the period 2009-2018.

This study suggests that companies in listed on KSE-100 index in Pakistan should

avoid high ratio of debt in capital structure and the level of debt should not exceed
 38

beyond optimal limit because financial performance decreases when debt increases

and high debt may lead organizations towards insolvency. The companies can use this

study to choose an optimum capital structure to maximize shareholders wealth and

company’s performance.

The corporate level of management should specially focus on the foreign ownership

and take decisions accordingly because it enhances the financial performance as well

as goodwill of the company. Institutional ownership also helps organizations to

achieve its goals and financial growth in long term. Organizations should take steps to

decrease the level of managerial shareholding due to negative impact on financial

performance.

Additionally, the outcomes of this study will be supportive to all stockholders as well

as stakeholders (creditors, investors, government, employees, suppliers, companies,

and managers etc.) that how performance is affected by the owners and selection of

financing mode, so that they make decisions about their future investments. This

research provides instrumental information and important insights regarding

ownership structure, capital structure and financial performance to researchers for

future work.

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