Effect of capital structure on stock Return-a case of fertilizer sector in Pakistan

Abstract

Capital structure decisions are the key financial decisions of a company since it affect return and risk of shareholders. This study examines effect of capital structures and stock return of the listed companies in the fertilizer sector of Pakistan. Literature review on the relationship between the stock return and capital structure of different sectors showed that there is mix movement such as positive, negative or neutral relationship. It also showed there is no conclusive evidence of what should be the optimal level of capital. This study assessed effect of debt/equity ratio, firm size, dividend, return on Asset (ROA), production of fertilizer, market return and stock return. There are seven fertilizer companies registered on the Islamabad stock exchange. This study covered five listed companies as two companies is not registered shares in the specified years at Islamabad stock exchange. The secondary data are obtained through the company’s website and data pertaining to fertilizer sector over the period 2009-2016. Correlation analysis, Panel Data analysis method and E-views is used for data analysis. This study found positive relationship of debt/equity ratio, firm size, dividend and return on Asset (ROA) with stock return while inverse relationship of production of fertilizer, market return with stock return. These findings have important implications for the investor who are interested for the announcement of dividend and managers, policy maker and stakeholder who make decision regarding capital structure, Therefore, the decisions regarding capital structure should be taken with care so that there is no negative impact on firm value.