Determinants of Firm’s Financial Performance: An Empirical Study on Textile Sector of Pakistan – Introduction

Determinants of Firm’s Financial Performance: An Empirical Study on Textile Sector of Pakistan - IntroductionThere are a total number of 411 firms in non-financial sector of Pakistan which is subdivided into 12 sectors while Textile sector is the largest and the first sector which comprise of a total number of 164 firms which covers 40% of the overall non-financial sector of Pakistan. The researcher used the financial data of 139 firms of textile sector because the remaining firms missed some of the financial records required for analysis. The textile sector represent a large part of the non-financial sector of Pakistan, the financial performance of this sector may influence the performance of the other sectors. The basic and fundamental duty of every financial manager is to maximize the shareholder’s wealth and to increase firm’s value which is possible when the firm’s financial performance can be increased. The researcher’s aim during this research is to identify the number of factor that determines the firm’s financial performance. The previous studies conducted on firm’s performance indicates that a large number of factors affect significantly the firm’s performance. David Durand presented different theories for starting the argument on firm’s value.

David Durand presented first theory with the name of Net Income (NI) approach, then after wards he presented Net Operating income approach and finally traditional approach to justify his opinion. He was of the view that increasing leverage can increase firm’s performance but he could not provide the operational justification to validate his point of view. Modigliani and Miller in their theses revealed it is not mandatory that a firm using leverage or not can have difference in their value. For the validity of their research they presented an operational justification with the name of arbitrage process. The arbitrage process states that investor purchases shares or make investment at low prices and sales their investment or shares at high prices simultaneously in different markets. Modigliani and Miller also found that debt provide the tax shield advantage in the form of interest. A lot of studies afterwards reveal that corporate financial performance or firm’s performance influenced by a number of factors that should keep in mind while making financial decision to increase a firm’s performance. The researcher used the framework of Zeitun and Tian. They used leverage, growth, size, tax, risk and tangibility to see their effect on corporate performance of Jordan non-financial sector. The researcher extended the regression model by including liquidity and non-debt tax shield (depreciation) to make this study more comprehensive.