Effect of Profitability and Financial Leverage on Capital Structure in Pakistan Commercial Banks

By Shahid, Hassan; Akmal, Muhammad et al. | International Review of Management and Business Research, March 2016 | Go to article overview

Effect of Profitability and Financial Leverage on Capital Structure in Pakistan Commercial Banks


Shahid, Hassan, Akmal, Muhammad, Mehmood, Sajid, International Review of Management and Business Research


Introduction

In current history, Commercial institutions playing a Vital Role in Pakistan's Economy. Moreover Commercial Banks have faced an animated aggressive, environment at national and international levels. One of the most growing magnitudes is the new model of Islamic Banking that has remarkably paying attention of both Islamic and conventional economists. Today Islamic banks are operating in all areas of the world, and are appear to be a convenient and realistic alternative system, which has different things in attendance. Although this is originally developed to bring about the Religious needs of Muslims people, at present Islamic banking has currently achieved worldwide. Acceptance Islamic banking is recognized as one of the utmost mounting areas in Banking and Finance.

There are Commercial Banks working in Pakistan, and on the other hand different Pakistani banks are working in foreign countries, like UBL, MCB, HBL and some other banks having their branches in Middle East and also some European Countries. Some of the overseas Commercial Banks working in Pakistan like, Citi Bank N.A, HSBC Middle East Bank

Barcclays Bank, Industrial and commercial Bank of China funding is indispensable component of management, mounting and get your hands on any dealing and needed for achieve deliberate strategy. Each and every one Financial Organization and other sectors of financial system necessitate resources to financing their material goods. At hand be dissimilar traditions for elevate capital and financing the trade & industry. The fundamental behaviors for bring together funds are issue share and receiving the amounts of overdue or debts. Sixteen Commercial Banks have been chosen by us in this paper which has been listed in Pakistan Stock Exchange, the phase is used from the year 2007 to the year 2015.

In our Topic we have protect the "Effects of profitability" and "financial leverage" on the Capital Structure" in "Pakistan Commercial Banks". Textile sector is one of the biggest manufacturing industries in Pakistan. It plays a major role in economy of Pakistan. Capital Structure is the combination of Debts and Equity amounts used by different firms, Banks, Business etc. The more the debts used by any firm can make him more risky and it can cause to sufferer the shareholder from losses. Debt and Equity will have been used in our paper for measuring the "Capital Structure" of Banking Firms. The relation of Business Earnings from Business Assets is called Profitability, these are interlinked. Profitability/Effectiveness is deliberated by gross earnings before the taxes are calculated to the complete amount of assets.

According to the "Packing Order Theory" firms may boost their "Profitability" by means of their internal finances. About "Profitability There is two different theories which have added their share in this regard:

The 'Trade off Theory' and the 'Pecking Order Theory'

According to first theory which is "Trade of theory" declare that due to Debts using a firm can increase its "profitability,. On the other hand as per Trade off Theory there is encouraging affiliation surrounded by profitability and leverage. Due to increase in amount overdue profitability also increases and to reverse this process it causes to decrease. "Pecking order hypothesis (Mayers, 1977) says that administrators have been enhanced information in relation to their companionship future than unknown and they can be able to defend or safeguard the interest of accessible investors. They said that they can bring into play retained earnings and if not possible then they can prefer debts over equities (Portaa et al., 2000; Sunder & " Myers, 1999)."

The concept of Leverage is used to boost up something, like levering something upward, whereas financial Leverage is used by different organizations and firms, and in our topic specified to the Commercial Banks the amount of "Loans or Debts" for financing the business assets. …

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Effect of Profitability and Financial Leverage on Capital Structure in Pakistan Commercial Banks
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