Academy of Strategic Management Journal (Print ISSN: 1544-1458; Online ISSN: 1939-6104)


Effect of Capital Structure on Corporate Liquidity and Growth: Evidence from Tobacco Industry in Pakistan

Author(s): Asma Salman

Financing decision is one of the important areas in financial management to attain high profitability, assets utilization, market value and growth rate. This research paper measures the effect and relationship between capital structure, liquidity and growth in the Pakistan tobacco industry. It analyzes whether the capital structure affects corporate liquidity and growth within the firms. To that affect, four leverage ratios are used to define capital structure, four liquidity ratios are used to define liquidity and two marketability ratios with four profitability ratios are assumed for corporate growth. Leverages ratios provide a guideline to see the company’s method of financing and its solvency, while the liquidity ratios measure the amount of liquid assets and whether these are enough to meet the current obligations. Similarly, the corporate growth is defined by considering market measures and profitability ratios. The purpose is to find out how firms’ financing decisions affect the corporate liquidity and growth in tobacco industry. Secondary data of tobacco companies listed on Karachi stock exchange over the period of 2011- 2016 is used. The regression test applied on calculated ratios demonstrated that leverage influences corporate liquidity and growth. It finds that tobacco companies are depending on debt financing and holding high proportion of short term debt. It is also explored that tobacco companies are highly liquid, attaining good market position and enjoying high profits which shows that leverage is positively related to corporate liquidity and growth. 

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