LIQUIDITY RISK VS. UNDERINVESTMENT PROBLEM : AN EMPIRICAL STUDY OF THE TEXTILE SECTOR OF PAKISTAN

Laila Taskeen Qazi, Shahid Ali, Atta ur Rehman

Abstract


This research study tests the underinvestment hypothesis and
the liquidity risk hypothesis in the textile sector of Pakistan. A panel
data set of 105 textile companies has been employed over eight years
extending from 2004-2011. Using 2-Stage Least Square Estimation
procedure (2SLS) and the Generalized Method of Moments (GMM),
the empirical findings reveal that textile firms in Pakistan use high
level of long term debt to shrink the liquidity risk which allows the
firms to use more debt. Moreover growing firms use less leverage than
the non growing firms when exposed to high growth opportunities.
The growth opportunities exhibited a negative relationship with debt
maturity but no significant economic relationship with leverage. In
the textile sector of Pakistan leverage and short term debt maturity
structure tends to complement each other to hedge the firms against
the liquidity risk.


Full Text:

PDF

References


Aivazian, V.A., Ge, Y. andQiu, J. (2005a). The Impact of Leverage on

Firm Investment: Canadian Evidence, Journal of Corporate

Finance, Vol. 11, pp. 277-91.

Aivazian, V.A., Ge, Y. andQiu, J. (2005b). Debt Maturity Structure and

Firm Investment, Financial Management, Vol. 34, pp. 107-

Antoniou, A.,Guney, Y. andPaudyal, K. (2006). The Determinants of

Corporate Debt Maturity Structure: Evidence from France,

Germany and the UK, European Financial Management,

Vol. 12, pp. 161-94.

Almazan, A. and Molina, C.A., (2005).Intra Industry Capital Structure

Dispersion. Journal of Economics & Management Strategy,

(2), pp.263-297.

Arellano, M. andBond, S. R. (1991). Some Tests of Specification for

Panel Data: Monte Carlo Evidence and an Application to

Employment Equations, Review of Economic Studies, Vol.

, pp. 227-97.

Booth, L., Aivazian, V., Demirguc-Kunt, A. and Maksmivoc, V. (2001).

Capital structures in developing countries, Journal of

Finance, Vol. 56, pp. 87-130.

Bradley, M., Jarrell, G.A. and Kim, E., (1984). On the Existence of Optimal

capital Structure: Theory and Evidence, Journal of Finance.

Vol. 39(3), pp.857-878

Barclay, M.J. and Smith Jr. C. W. (1995). The Maturity Structure of

Corporate Debt,

Journal of Finance, Vol. 50, pp. 609-31.

PAKISTAN BUSINESS REVIEW JULY 2016

Research

Liquidity Risk Vs. Underinvestment Problem

Barclay, M.J., Marx, L. M. and Smith Jr. C. W. (2003). The Joint

Determination of

Leverage and Maturity, Journal of Corporate Finance, Vol. 9, pp.

-67.

Billett M.T., King, TH. D. and Mauer, D. C. (2007). Growth Opportunities

and the Choice of Leverage, Debt Maturity, and Covenants,

Journal of Finance, Vol. 62, pp. 697-730.

Brick, I.E. andRavid, S. A. (1985). On the Relevance of Debt Maturity

Structure, Journal of Finance, Vol. 40, pp. 1423-37.

Childs, P.D.,Mauer, D. C. and Ott, S. H. (2005). Interactions of Corporate

Financing and Investment Decisions: The Effects of Agency

Conflicts, Journal of Financial Economics, Vol. 76, pp. 667-

Dang, V.A., (2011). Leverage, debt maturity and firm investment: An

empirical Analysis. Journal of Business Finance and

Accounting, Vol. 38 (1) & (2), pp. 225-258.

Datta, S., ISKANDAR DATTA, M. A. I., & Raman, K. (2005).

Managerial stock ownership and the maturity structure of

corporate debt. The Journal of Finance, Vol. 60(5), pp.2333-

DeAngelo, H. and Masulis, R. (1980). Optimal Capital Structure under

Corporate and Personal Taxation, Journal of Financial

Economics, Vol. 8, pp. 3-29.

Diamond, D.W. (1991). Debt Maturity Structure and Liquidity Risk,

Quarterly Journal of Economics, Vol. 106, pp. 709-37.

Diamond, D.W. (1993). Seniority and Maturity of Debt Contracts,

Journal of Financial

Economics, Vol. 33, pp. 341-68.

PAKISTAN BUSINESS REVIEW JULY 2016

Research

Liquidity Risk Vs. Underinvestment Problem

Elyasiani, E., Guo, L., &Tang, L. (2002). The Determinants of Debt

Maturity at Issuance: A System-Based Model, Review of

Quantitative Finance and Accounting, Vol. 19, pp. 351-77.

Flannery, M. and Rangan, K., (2006). Partial adjustment towards target

capital structures, Journal of Financial Economics, Vol. 79,

pp. 469-506.

Frank, M.Z. and V.K. Goyal, (2007). Trade-off and Pecking Order

Theories of Debt’, in Eckbo, B.E. (ed). Handbook of

Corporate Finance: Empirical Corporate Finance. North

Holland, Handbooks of Finance, Elsevier Science.

Frank, M.Z. and V.K. Goyal, (2009). Capital Structure Decisions: Which

Factors are Reliably

Important, Financial Management, Vol. 38, pp. 1-37.

Guedes, J. and Opler, T., (1996).The determinants of the maturity of

corporate debt issues, Journal of Finance, Vol. 51, pp. 1809-

Hart, O. and Moore, H. (1994). A Theory of Debt Based on the

Inalienability of Human Capital, Quarterly Journal of

Economics, Vol. 109, pp. 841-79.

Jensen, M. and Meckling, W. (1976). Theory of the Firm: Managerial

Behavior, Agency Costs and Ownership Structure’, Journal

of Financial Economics, Vol. 3, pp. 305-60.

Jensen, M. and Meckling, W. (1986). Agency Costs of Free Cash

Flow, Corporate Finance and Takeovers, American Economic

Review, Vol. 76, pp. 323-39.

Johnson, S.A. (2003). Debt Maturity and the Effects of Growth

Opportunities and

Liquidity Risk on Leverage’, Review of Financial Studies, Vol. 16, pp.

- 36.

PAKISTAN BUSINESS REVIEW JULY 2016

Research

Liquidity Risk Vs. Underinvestment Problem

Jun, S.G. and Jen, F. C. (2003). Trade-off Model of Debt Maturity

Structure’, Review of Quantitative Finance and Accounting,

Vol. 20, pp. 5-34.

Kane, A., Marcus, A. J. and McDonald, R. L. (1985). Debt Policy and

the Rate of Return Premium to Leverage, Journal of Financial

and Quantitative Analysis, Vol. 20, pp. 479-99.

Mauer,D .C. and Ott, S.H., (1998). Agency costs, investment policy

and optimal capital structure: The effect of growth options,

in Project flexibility, agency, and competition: New

developments in the theory and application of real options,

pp.151-179. Oxford University Press, London

Myers, S.C. (1977). Determinants of Corporate Borrowing, Journal of

Financial Economics, Vol. 5, pp. 145-75.

Myers, S.C. and Majluf, N. S. (1984). Corporate Financing and

Investments Decisions When Firms have Information That

Investors Do Not Have, Journal of Financial Economics,

Vol. 13(2), pp. 187-221.

Modigliani, F. and Miller, H. H. (1958), ‘The Cost of Capital, Corporate

Finance and the Theory of Investment’, American Economic

Review, Vol. 49, pp. 261-97.

Modigliani, F. and Miller, H. H. (1963), ‘Taxes and the Cost of Capital:

A Correction’, American Economic Review, Vol. 53, pp. 433-

Ozkan , A., (2000). An empirical analysis of corporate debt maturity

structure. European

Financial Management, Vol. 6, pp. 197-212.

Ozkan, A., (2001). Determinants of capital structure and adjustment to

long run target:

PAKISTAN BUSINESS REVIEW JULY 2016

Research

Liquidity Risk Vs. Underinvestment Problem

Evidence from UK company panel data. Journal of Business Finance

and Accounting, Vol. 28, pp. 175-198.

Ozkan, A., (2002). The determinants of corporate debt maturity:

evidence from UK firms.

Applied Financial Economics, Vol. 12, pp. 19-24.

Sharpe, S.A. (1991). Credit Rationing, Concessionary Lending, and

Debt Maturity, Journal of Banking and Finance, Vol. 15,

pp. 581-604.

Shah, A. and Hijazi, T. (2004). The determinants of capital structure of

stock exchange-listed non-financial firms in Pakistan,

Pakistan Development Review, Vol. 43, pp. 605-618

Stohs, M.H. and Mauer, D.C., (1996). The determinants of corporate

debt maturity Structure. Journal of Business, Vol. 69, pp.

-312.

Titman, S.,and Wessels, R., (1988). The determinants of capital

structure choice. Journal of Finance, Vol. 43(1) , pp. 1-21.

Rajan, R., andZingales, L., (




DOI: http://dx.doi.org/10.22555/pbr.v18i2.831

Refbacks

  • There are currently no refbacks.


Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.