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

Determinants of Firm’s Financial Performance: An Empirical Study on Textile Sector of Pakistan - Regression AnalysisThe researcher used STATA 11 software for the regression analysis of the current study. The dependent variable is firm’s performance measure ROI while the independent variables includes Leverage (short, long), Growth, Size, Risk, Tax, Tangibility, Liquidity and Non-debt tax shield. The descriptive statistics showing mean, standard deviation, minimum and maximum values of textile sector indicated in table 2 while correlation matrix of textile sector is indicated in table 3. The regression result using one-way fixed effect model is indicated in table 4. The presence of fixed cross sectional effect is evidenced by the significant results of hausman test which validate the name of this model as one way-fixed effect model according to Baltagi. The above table 2 indicates the descriptive statistics like Mean, Standard deviation, Min and Maximum of Firm’s performance (ROI) and other firm’s specific factors like Leverage, Growth, Size, Risk, Tax, Tangibility, Liquidity and Non-debt tax shield (Depreciation) during the period 2005-2010 for Textile sector of Pakistan. The above table indicates that short term leverage has an average (mean) value as 51% in textile sector’s firm’s performance approximately, while long term leverage showing (mean) value as 22% in Textile sector. The firm’s Size in Textile sector on average (mean) value showing 139%. The above table 4.2 indicates the correlation matrix of dependent and independent variables in textile sector of Pakistan for the period 2005-2010. It indicates that short term and long term leverage including tax and tangibility having negative correlation with firm’s performance while growth, size, risk, liquidity and non-debt tax shield having positive correlation with firm’s performance in textile sector of Pakistan.

The highest correlation is indicated between non-debt tax shield and firm’s performance as 0.71 approximately according to the above table. The above table 4.3 indicates results of one-ways fixed effect regression model estimation. The overall model is statistically fit and significant in both sectors. It indicates that short term leverage is significant at 5% level in textile sector and showing negative relationship with firm’s performance and accepts the 1st hypothesis. The negative relation between leverage and firm’s performance is also consistent with the following researchers like Krisnan and Moyer, Onaolapo and kajola, Memon, Bhutto and Abbas and Zeitun and Tian. It indicates that firm’s performance in textile sector is significantly influenced by short term debts. Growth is not significant at any level and showing negative relationship which rejects the 2nd hypothesis. However the negative relationship between growth and firm’s performance is consistent with the similar findings of previous researchers Zeitun and Tian while the other researchers like Krishnan and Moyer, Onaolapo and Kajola, Memon, Bhutto and Abbas found positive relationship between firm’s performance and growth. Firm’s size is significant 1% level and accepts the 3rd hypothesis. This positive relationship is consistent with the following researchers like Onaolapo and Kajola, Krishnan and Moyer and Zeitun and Tian. It indicates that firm’s size increases firm’s performance in textile sector of Pakistan. Risk is significant at 5% level in textile sector. It is showing positive relationship which accepts 4th hypothesis. This positive relationship between risk and firm’s performance is also consistent with the previous researchers who found the same relationship like Memon, Bhutto and Abbas and Krishnan and Moyer. It indicates that more risky firms tend to perform well in textile sector of Pakistan.

Table 2. Descriptive Statistics

Variables Mean SD Min Max
Return on Investment (ROI) .0231793 .1554565 -1.71287 1.736175
Short term Leverage (S-Lev) .5139861 .2567038 .0085605 2.546073
Long term Leverage (L-Lev) .2236888 .2091147 0 1.730722
Growth (GR) .0337597 .2263425 -2.86857 .9645731
Firm’s Size (SZ) 13.88058 1.417079 7.34601 17.26663
Risk (RK) 1.388222 4.136975 -42.9379 73.95914
Tax (TX) .8204285 13.75174 -58.7819 381.2666
Tangibility (TN) .9245616 .4761682 0 5.93239
Liquidity (LQ) 1.045564 1.070488 .04 10.55
Non-debt Tax shield (ND) .1021373 .5978221 -10.9418 5.070107

Table 3. Correlation Matrix for Textile Sector

ROI S-LV L-LV GR SZ RK TX TN LQ ND
ROI 1.000
S-LV -0.056 1.000
L-LV -0.132 -0.079 1.000
GR 0.089 -0.109 -0.108 1.000
SZ 0.137 -0.194 -0.129 0.223 1.000
RK 0.057 0.003 -0.030 0.002 0.063 1.000
TX -0.003 0.026 -0.013 -0.003 -0.018 -0.007 1.000
TN -0.106 0.264 0.262 -0.277 -0.413 -0.041 -0.000 1.000
LQ 0.039 -0.204 -0.121 -0.015 0.051 0.029 -0.036 -0.101 1.000
ND 0.705 -0.044 -0.092 0.060 0.053 0.017 -0.609 -0.045 0.045 1.000

Table 4. Regression Results – One way fixed effect regression model Dependent Variable = Firm’s Performance (ROI)

Independent Variables II IIK
Coefficients P-values Coefficients P-values
Leverage (S-Lev, -.0315 ** .01988 0.2
L-Lev) 93 0.026 23 21
Growth (GR) -0.014 0.2 -.0124 0.3
184 39 429 02
Firm’s Size (SZ) .01869 *0. .01889 *0.000
4 000 60
Risk (RK) .00142 ** .00144 **0.021
3 0.023 25
Tax (TX) .00775 *0. .00779 *0.
3 000 07 000
Tangibility (TN) -.0072 0.5 -.0116 0.2
14 11 991 98
Liquidity (LQ) -.0007 0.8 -.0002 0.9
47 43 636 44
Non-debt Tax shield .29488 *0. .29660 *0.
(ND) 3 000 95 000
Constant -.2505 0.0 -.2707 0.0
96 01 327 00
Number of =834 =834
Observations
No of Groups =139 = 139
F=325.51 F=323.44
Overall Model Prob>F = 0.0000 Prob>F=0.0000
Fitness
R2 (Within) =0.7913 =0.7902
R2 (Between) =0.7833 =0.7926
R2 (Overall) =0.7847 =0.7866
F-test that all u-i=0 F=1.57 F=1.54
Prob>F=0.0001 Prob>F=0.0003
Hausman test Prob>Chi2=0.000 Prob>Chi2=0.007
Note: The current table is generated by the output STATA 11 regressionresult
*significant at 1% level, **significant at 5% level, ***significant at 10%level