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

Determinants of Firm’s Financial Performance: An Empirical Study on Textile Sector of Pakistan - Literature ReviewA large number of previous studies relating to firm’s performance or sometimes corporate performance has identified a number of factors that empirically and even significantly affecting the firm’s performance. There are a little number of research findings available in Pakistani context relating to firm’s performance however the foreign researchers has done a lot in this context. The researcher used the framework of Zeitun and Tian with the extension in their regression model by adding liquidity and non-debt tax shield and applied this regression model simultaneously on textile and food sectors of Pakistan. The findings of Zeitun and Tian indicated that leverage has a significant and negative relationship with firm’s performance. They used leverage, growth, size, tax, risk and tangibility as independent variable to see their effect on firm’s performance. They concluded that firm’s size and tax have positive and significant relationship with firm’s performance while risk and tangibility have negative and significant relationship with firm’s performance. Memon, Bhutto and Abbas concluded in their study of capital structure and firm’s performance on textile sector that the companies in this sector are performance below optimum level of capital structure and also fail to achieve the economies of scale. Nosa and Ose found that effective funding required for the growth and development of the corporations in Nigeria.

They suggested enhancing the regulatory framework for increasing the firm’s performance by focusing on risk management and corporate governance. Onaolapo and Kajola found a significant and negative relationship between debt ratio and firm’s financial performance. The study conducted by Krishnan and Moyer found a negative and significant relationship between leverage and firm’s performance while other factors affecting firm’s performance positively includes size, growth, tax and risk. Jensen and Meckling found two types of agency cost; agency cost of equity holders and agency cost of debt holders. They concluded that a conflict of interest arises between the management and the shareholders when management take decision against the interest of shareholders and another conflict arises when the shareholder act against the interest of debt holders. William found that decision for high leverage by the management decreases the conflict between management and shareholders. The leverage can work as disciplinary device that controls the management from wasting their firm’s resources according to Grossman and Hart. The researcher in the current study used short term as well as long term debts as proxy for leverage and also the other factors like growth, size, tax, risk, tangibility, liquidity and non-debt tax shield for measuring their impact on firm’s financial performance in textile as well as food sector comparatively for the period 2005-2010.