Impact of Capital Structure and Financial Performance on Stock Returns: 'A Case of Pakistan Textile Industry'

Abstract

Capital structure changes and financial performance are of central importance to judge the overall returns of the firms, and more importantly to know whether stock returns are sensitive to changes in capital structure. To investigate the relationship empirically, data for 69 textile firms for the period 2003-2009 were collected. To quantify the impact, stock return was taken as a dependent variable and debt to equity, return on equity ratio, cash flow ratio, earning per share and time interest earned ratios were used as independent variables. Using ordinary least square model, results were drawn. Debt to equity ratio, return on equity ratio, cash flow ratio, earning per share and time interest earned ratio positively affect stock return, based on the empirical finding it was concluded that variation in capital structure and firm performance does affect the stock returns of Pakistani textile industry.