The type of data is panel/longitudinal and has been created from the State Bank of Pakistan’s annual publication “Financial Statement Analysis of companies (non-financial) listed in Karachi Stock Exchange for the period 2005-2010”. This statement contains the 6 years financial figures of 12 different sectors relating to non-financial industry having 411 firms in total and available online at www.sbp.org.pk while the researcher selected the Textile sector because it covers the greatest part of overall population of non-financial industry in Pakistan.
The sample consists of 139 companies from textile sector of Pakistan. The findings of the current study is applicable on all sectors of non-financial industry of Pakistan as the sample selected covers 4.0% approximately of the whole population of non-financial industry.
It is not applicable on financial industry like banks and insurance sector as their capital structure is entirely different from non-financial sector.
For regression analysis of Panel data, there are three methods available for their regression like fixed effect, Random effect and constant coefficient regression model. The choice between fixed effect and random effect is finalized by hausman specification test while the choice between random effect and constant coefficient model is finalized by Lagrange multiplier test. As there is a large number of companies in the current study while the time period is small so the data type is short panel according to Baltagi.
The previous studies have shown a number of proxies for measuring firm’s financial performance like ROA, ROE, Tobin’s Q, EPS and ROI. Some of these variable required current market data like Tobin’s Q. The researcher in the current study used Return on asset (ROI) as dependent variable for measuring firm’s financial performance while the independent variables includes short term and long term leverage, growth, firm’s size, risk, tax, tangibility of fixed assets, liquidity and non-debt tax shield (depreciation).
The description of each variable and their expected signs are given below in the following table 1. On the basis of above table the relationships between dependent and independent variables have been developed in the following hypothesis:
H1: Leverage (short & long term) should have a negative impact on firm’s performance.
H2: Growth should have a positive impact on firm’s performance.
H3: Firm’s size should have a positive impact on firm’s performance.
H4: There should be a positive relationship between risk and firm’s performance.
H5: There should be a positive relationship between tax and firm’s performance H6: Tangibility should have a positive relationship with firm’s performance.
H7: Liquidity should have a positive relationship with firm’s performance.
H8: There is a positive relationship between Non-debt tax shield and firm’s performance.
Table 1. Explanation of Dependent and Independent variables and Expected signs
|Leverage||Short term debt/Total assets, Long term debt/Total Assets||Negative|
|Growth||A Total Assets/ Total Assets||Positive|
|Size||Natural Log of Total Sales||Positive|
|Risk||EBIT/Earning after interest and Tax||Positive|
|Tax||Current year’s Tax/Earnings before Tax||Positive|
|Tangibility||Fixed Assets/Total Assets||Positive|
|Liquidity||Current Assets/Current Liabilities||Positive|
|NDTS||EBIT + Depreciation/Total Assets||Positive|