Abstract

This paper aims to find out the effects of financial leverage on firms’ investment decisions in the Banking Sector of Pakistan. Utilizing panel data techniques along with common effects, fixed effects, and random effects for listed banks from 2006 to 2013, the results indicate that leverage is having no significant effect on the investment decision of banks in Pakistan and hence we support Modigliani and Miller (1958) proposition of Irrelevance theory. To current study is going to provide useful insights to banks and investors that investment decision is irrelevant to the way company is financed, rather banks must focus on other factors such as interest rates, available cash flow, profitability which are found to be relevant to the investment decision. It will also serve as basic literature for future research.

Highlights

  • The primary objective of Financial Management is to maximize shareholders’ wealth, which is denoted by the market price of the company’s common stock

  • We reject that financing decision and investment decision are interdependent and financing decision can significantly impact investment decision which may result in over-investment or under-investment, any presence of such factors as transaction cost and asymmetric information, and agency problems

  • According to (Miller et al, 1958) proposition, the investment decision of a firm depends upon factors such as Profitability and Cash Flows

Read more

Summary

Introduction

The primary objective of Financial Management is to maximize shareholders’ wealth, which is denoted by the market price of the company’s common stock. Investment decisions define the firm’s asset structure, the extent of liquidity of such assets, and the firm’s investment in new products and services. It defines how efficiently a company utilizes its resources. Capital structure irrelevance theory proposed by (Modigliani and Miller 1958) stated that under perfect market conditions, investors are least bothered about the use of leverage by firms since marginal investors will diversify financial risk. Miller’s work was enlarged, when Deanglo and Masulis (1980) explored the impact of tax shields other than interest payments on debt They found out that the presence of corporate tax shied substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits. Companies normally prefer internal financing (cash flows) over debt and debt over equity

Objectives
Results
Conclusion
Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call