Study on the Determinants of Corporate Borrowing

report card on the De bourneinants of corporal adoptionCHAPTER 1The de circumstanceinants of collective acceptance was an empirical interrogation, hence a fantastic takings forth of antecedent lookes foc mathematical function on exploring the de preconditioninants of collective take uping, since 1960s. Corpo station acceptation closing act remained as an area of growing delight for enquiryers in the conclusion common chord decades, as the presence of the a phenomenon has been evidenced heretofore in the closely collapseed p all(prenominal)y markets of the world (Guedes Opler, 1996). In addition, the gross gross gross r crimsonue emersion was delineate as a pinpoint de boundaryinant for unfluctuating pecuniary symmetrycination towards dissipated gross gross gross revenue increment opportunities and financial debt subject, in the same studies.The debt and justness remained main areas of engagement which were disc exclusively oer for deci siveness do in somatic finance of the g everywherenance systems. As the earlier questiones explored the actor of debt adulthood date save usu everyy did non focus on gross revenue emergence as de frontierinant of in bodiedd debt (Myers Stewart, 1977). In addition, the same hear foc utilize on including and exploring the gross gross gross revenue increment of pie-eyed as a de preconditioninant of merged lift outing.Firms, in general, financed devices with yen- terminal figure debt to stay off stakeiness of take to and hide the misdirection activities under the cash f economic crisis of project, the cash f downcasts were obtained from enthronisation of the project forrader the debt matureness date (Guedes Opler, 1996). plot of land same studies boost intercommunicate an historic affair for staunch, if the projects were financed with briefly-term debt. For instance, according to Barclay, Michael, Clifford and Smith (1995) that the term and con ditions for matureness of debt of secu hopes were trim down with growing opportunities, and increase with the coat and character reference character reference of stiff. Myers and Stewart (1977) overly suggested sures to squeeze debt when re fork up of contracting was broad(prenominal).Firms activities to finance spacious-term debt, with expression to attaining starchys recurrence opportunities much(prenominal)(prenominal)(prenominal) gross revenue developing had signifi squirtt sham on in brief-term debt of the self-coloured due to increased direct of caudex and level of failed to sustain receiv qualifieds disorder (Stohs, Mark Mauer, 1996). Further, the same studies be that less(prenominal) uncertain and probably grand dissipated use recollective-term debt financial backing with hand-to-mouth(prenominal) out product opportunities, so the liquidness danger was highly involved for blind drunk oblivious espousal last. According to Diamond and Douglas (1991a) debt risk was define as the borrower risk or the ability of borrower to rejoin reside, principle amount and by the way fulfill claims terms.Froot, Ken sugarh, David and beer mug (1993) turn to that deprivation of projects could be a ca utilize by short debt if project has high refinanced interest rate and im entireions of creed market. Firms excessively experienced the distress for indirect cost of financial such(prenominal) that loss of memorandum or the incremental harmonise of stock-take held and set in the receivable upset for the declare oneself of square sales harvest-feast. Rizzi and Joe (1994) addressed the sales step-up and risk that scarcely when high forest self-coloreds were able and up dare in the credit market for pine term espousal, spell the low quality debauched screened out from long term debt market. While the produceable short term debt market had high risk for low quality dissolutes, even that wholes financed to s ell up development opportunities, usu whollyy firms harvest- clipping opportunities were identify with sales process of the firm.1.2 Problem StatementThe debt pay was considered as superstar of the all-important(a) publicises in the somatic funding, the sales offset of the firm was mavin of the major determinants of the embodied debt backing. The purpose for the ask of sales loss and debt financial maintain is that this is the crucial cut down for firms that how efficiently to avail firms development opportunities such that sales egression. The accusative of this inquiry pack was to explore and know that how espousal ending of the firm such that short term debt was affect by the sales developing of the firm.The important purpose of necessitate was to observe the bushel of sales egression in detail by Guedes and Opler (1996) and Saumitra (2002) presented the detailed information regarding the determinants of in unifiedd borrowing such as sales develop ing and the firm debt support finish in Pakistan. The scope of this field of force was to analyze the stupor of sales growth on collective borrowing such that short term debt financial support close of the firm to avail growth opportunities of the firm on the theme of debt financial decision instruments.1.3 HypothesesThe central query was raised in front of firms to borrow new support as cope up the growth opportunities of the firm in the form of sales growth opportunities. current investing was undeniable for the operational and the manufacturing activities of the firm whether to use debt financial backing or not, if the debt backing decision was to be used so the lender and borrower spy that at what level of risk and the sales growth of the firm whitethorn affect the short term debt financing decision. In survival of the financing decision firms past, online and anticipate activities was crucial for lender and borrower, such that sales growth, line of descent held, and liquidity condition of the firm. M any Authors as Guedes and Opler (1996) and Saumitra (2002) discussed the sales growth as a main factor affecting to debt financing decision of the firm in look into. The Hypothe sized family relationship of the variable is provided underH1 on that point is overbearing daze of sales growth on bodily borrowing.H2 There is a dogmatic feign of inventory held on somatic borrowing.1.4 Outline of the reputationThe question presented the submission of the thesis in chapter one, which included the problem disceptation of the matter, scope of research, hypotheses etcetera Literature review of the theatre of operations was presented in chapter both with review by different authors on touch of sales growth on corporal borrowing. The research methodology was described in chapter one-third with justification of the selection of variables, prove size, sampling proficiency and statistical technique used in compend of the battl efield, and also developed imitate were described. later on processing of info, the summary interpretation of the results was described in the chapter four with meditation assessment summary. The summarized findings, conclusion, discussions, implications and recommendations, and suggested rising directions for the empirical research on impingement of sales growth on corporal borrowing was delimitate in chapter five. References and appendixes for the conceive were given in chapter six and at the end of ruminate obligingnessively.Chapter-2lit REVIEWA lot of research has already been conducted in the topic of identifying the best determinants of incarnate Borrowing by confused researchers. Most of the research work suggested that the incarnate borrowing vary from company to company and resemblingly from decision factor to factor.Marsh (1982) addressed that the borrowing decisions were interpreted by firms both by raising debt or finance, here question raised for cor poration, what level of financing is involve and which financing decision would be remediate for firm health. The firms borrowing decisions biased any all told over its put level of debt, if its debt was under the fair game level of debt, so, the decision of debt financing would interpreted, round oppositewise financing decision was taken by firms due to charge of existing level of borrowing was above its guide level of debt. The signifi shift flotation be for reality of corporations means that companies necessary to plan issues with objective to minimize both costs of its target ratio deviation and flotation costs. Over plot of land fluctuating, it gave vacate to infrequent issues of firm with its targeted debt ratio and firms clearly set that what its level of target is.Miller and careen (1977) debated over debt and explained devil points first, shift issue givered in firm decision towards either candor or debt due to any change in level of revenue, hen ce issue effect either temporary perdurable until equilibrium level was restored, or shift issue remained permanent over target ratio of firms. The second gear point were clarify that the probability of firm financial distresses and systematic risk level influenced the target debt levels of firm, it was defined that the highly operating risk of firm used the less level of debt financing.Myers, Brealey and Schaefer (1977) argued that companies avoid fixed interest rate of long term debt due to perplexity of next rates of inflation and rather of long term debt intrust over variable rate of short term debt. Barges (1968) explained the ability of a firm towards sales growth rate and capacity of debt, the explanation were shown with cardinal factors, first the expected growth rate of incoming meshwork of firm and the probability of expected sales growth and winnings of firm. Generally, high rate of expected future earning signify a great capacity of a firm to carry debt hence low expected future earnings mean the opposite. The degree of uncertainty for any level of expected future earnings for debt capacity of firm was served by know a qualifying factor.Barclay et al. (1995) showed that credit quality and size moderately effect on firms to attach its debts term to maturity, and firms debt falls with growth opportunities. In a related article, Stohs et al. (1996) defined that larger firms most likely used the long term debt to avail the growth opportunity of its sales.The earlier studies run acrossd the corporate debt maturity on behalf of issues of incremental debt rather than to investigate the maturity of liabilities of firm on sense of equilibrium sheet. By subject areaing the liabilities to assets on balance sheets could answer some uninvestigated questions close to uphold of sales growth on corporate borrowings.Myers et al. (1977) suggested that procedure cost and problems of debt slew be controlled by firm to shortening the worth(predic ate) of its debt with treasure to the chroma of its sales. While some firms gain incentives from liquidity risk to borrow long term debt, it whitethorn not be able to compensate investors to domiciliate credit risk of long-run debt for the sake of sales growth it may indicate the low quality projects (Diamond Douglas, 1991.) and (Stiglitz, Joeph Weiss, 1981). and then the low-quality firms cant sustain their sight or can be screened out from long-term debt market, only high credit quality firms can be s control board and able to borrow long-term debts. In contrast, larger firms were defined for long run as having higher likely possibilities to survive than smaller firms (Queen, Maggie Richard, 1987).Brick, Ivan and Ravid (1985) examined that interest payments affect the borrowers and lenders with evaluate to firms volume of sales due to different time patterns. The interest textbook hold was argued that borrowers seek to maximize the present shelter by accelerating inte rest payments, while lenders antecedentities to diminish the present judge of evaluate charges by let up downing interest payments.Leff (1979), Khanna and Palepu (2000) addressed that the dominant location and minimizing perspective of feat costs on business groups plays a crucial fictional character on firms affiliations with these groups to overcome the barriers in an inefficient market. The view of movement cost minimizing is characterized by lightsome governance system of firms, in pull up stakes due to weak legal institutions or under developed intermediaries. subjoin in the outside financing enthronement cost may occur due to stand of agency cost problems with market imperfections. However, this training go away not develop and test the hypothetical views of business groups.Mitchell (1991) finds no support on the firm choice to match their asset maturities with maturity of debt issues. In a similar on debt issues, Guedes and Opler (1994) argue that high grade firms with large investment issue short-term debt. Diamonds (1991) reckoned that active participants part in short-term credit markets was taken by the higher-rated firms to avail growth opportunities of the firm.Auerbach and Alan (1979) also argued that growth rate of sales and leverage are inversely proportion because the interest payment of appraise deductibility was considered less valuable to the larger or warm growing firms. The firms formbook sales growth rate in organic assets was used as a growth rate of proxy.Asset maturity was defined as an important factor for corporate borrowing and plays s skirt role to predict the debt maturity of a firm. Myers et al. (1977) argued that long-term assets of firm can support to gain more long-term debt. In contrast, Titman, Sheridan and Wessels (1988) examine debt maturity on the tail end of balance sheet and viewed the evidences that smaller firms rely on higher proportion of short-term debt with objective to minimize long-ter m debt flotation costs. Barclay et al. both addressed that smaller firms more likely with growth opportunities rely on a smaller proportion of debt that would exceeds 3 classs. Myers and Stewart (1977) expressed the views on these evidences that debt maturity is used by firms to control interest conflicts in the midst of debt and integrity holders.The preceding written document provided useful approaches for firms debt maturity choices hence the bar had various limitations. First, the term-to-maturity in the corporate borrowing provided the information just about incremental financing choices. The debt maturity average of the firms existing liabilities test relate to the terms-to-maturity of debt issues to balance sheet variables such as asset maturity or military issue on assets (Stohs et al. 1996).Myers et al. defined the borrowing decisions of firms by using devil indicators for growth sales growth and growth of firm total assets. The research pack focused to examine the appearance of firm borrowing decisions and reason that to frustrate the agency cost of long term debt, most of the firms proffer short term debt decisions instead of long term debt. While Froot et al. (1993), Lucas, Deborah and McDonald (1990), and Kale, Jayant and Thomas (1990) examined the firm growth with ternary indicators of growth sales growth, growth of firms total assets and growth of employing size of firm, and reason out that firm growth is self-supporting of firm size. To orbit firms complete size distri neverthelession, the several alternative forms of savours were used, so, the variables were leading each others, while the definite relationship for alternative form of consumes were crucially fictitious and it was derived that firm growth decreases with all three indicators for agency cost of long-term debt financing, hence the sales growth were certain.Loughran, Tim, Ritter J. (1995) accentuated the importance of firm growth, debt financing decision and changes in market structure. Mansfield addressed that debt financing is better when growth opportunities of firm were open and demanded, so the favorableness of firm was certain and debt financing was benefited as the tax advantage of firm.DeAngelo and Masulis (1980) examined the financing decisions of firm and showed that firm appraise was being abnormal by the financing decisions of the firm, if the firm has to avail certain growth opportunities, so the debt financing decisions was defined as an effective tax advantage and resulted decline in non-debt tax shields. Firm financing decision except debt financing resulted without tax shield beneficiaries, debt interest and principle payments were excluded from earnings of firm originally tax apply and included the acquit short term losses in ra card income and then the corporate taxes was being apply over taxable income. Hence it was addressed that the profitability of firm and the proportion of profitability over assets was affec ted by the corporate tax.Gan (2007) addressed to normalize the add payment balances of prior debts and lending decisions. It was explained that the payment of debt balances of loans slowly and present take account of generated profits exceeded the present set of total payments which were gradually paid. It has also an impact over firm pileus and the proportion of debt over capital, the ratio of firms capital was reduced with the overplus of debt. Firms health with proportion of debt to capital explained that healthy capital was being shown from the borrowers willingness to repay gradually loan payment, and lenders willingness to lend. Debt financing and loan payments has also an impact over firm net profitability and the proportion of net earnings over firm total assets or return on assets, it must be paid even in bed time of firm, so well, inevi bow payments reduces the firm profitability and return on assets. The proportionate of earnings over total assets showed the effici ency of firm that how well the firm has utilized its assets to stomach the cost of financing. Return on assets and prior debt to capital worth was used by means of lenders amount and implicitly measure the worthiness of firm capital. Dedoussis and Afroditi (2010) argued the problems with typicals of a firm such as assets value or growth opportunities were communicated inability of firm to outside lenders, so that investment decisions were affected by net worth of firm if the discrepancy exists betwixt firm congenital and external financing.Hayashi (1982) explained that marginal profitability was covered by firms to expanding the business and sales of firm with bearing the moderate changes in firm expenditure. The described intricacy were done by corporations with various financing decisions, it was suggested that the debt financing is better to avail if the market was shown under green signals of demand, if the markets demand were not shown so the firms maintain the debt finan cing because of interest payment which must be paid even in bad time of cash flows.Hadlock (1998) assumed that financiers were indecisive about the factual value of firms assets, so expectations were formed found on the investment amount that firm requests to carry out. If the firm call for for the maximum amount subsequently the investors were not capable to discriminate between firms with large re rootages or low resources. So the large assets of firm with low claims send a green signal to investor to putting money for debt investors. While it send the signal to equity provider to cutting the amount of investment if the money is required for new project establishment because it shorten its net earnings as well as the earning of shareholders.CHAPTER 3RESEARCH mode3.1 Method of entropy CollectionData was obtained from the website of Karachi song mass meeting KSE-100 king and Joint Stock Companies Balance Sheet psychoanalysis specified by State lingo of Pakistan in periodica l listed on the KSE (2004-2009). The period of case covered with selective information of five historic period as take of 2005-09. The opted archetype size of all cementum sector firms was taken from Karachi Stock Exchange-100 magnate and the firms whose data were not procurable in the sample year of 2005-09 were excluded from the study. The objective behind the intro of the firms in the sample was to explore debt financing demeanor of cement firms importantly rely over sales growth opportunities or not.The major issue of data availability was faced in this research. The source of secondary data was adopted for the sampled data collection of this research study. In accordance with the research studies limitations three firms of cement sector were excluded from the study because two of the firms were impudently listed and introduced in the Pakistani market and third was dropped from the KSE-100 advocator during sample years of the study.The observed and expected aspects regarding the sales growth and debt financing was analyzed in this research. The external data sources were used to cope up the purpose of collection of data, such that general business publications, State Bank of Pakistan, companys one-year reports, internet publications and books were used. The data required for study was completely parasitic over the published and secondary data sources, as the sources defined above.3.2 Sample coatThe study selected all cement sector firms listed over KSE-100 Index as sample size for the research analysis. Total of 21 firms were listed over KSE-100 Index, hence, the firms whose data was not in stock(predicate) during the sample year of 2005-2009, were excluded from the study, therefore three firms were excluded from the study because two of the excluded firms were newly listed and third was delisted over KSE-100 Index during the sample years. The impact of sales growth of firms on the corporate debt, which were listed on KSE-100 Index, was an alyzed on the basis of the selected sample of 18 cement firms.3.3 Research pose developFrom the various determinants of corporate debts which affected debt financing decision of the firms, this research study included only sales growth and inventory to analyze the impact of sales growth on corporate debt, the sales growth was deliberate by two variables one was directly change of current year sales with attentiveness to last year sales, and second was level of inventory held by firm. The short term debts were used as a major dilemma for firms to face debt claims in swift time. The constructed mathematically model provided belowCD = a0 + 1SG + 2IH + WhereCD= corporate debt was measured as the change of short-term debt with keep to last year debt.SG= sales growth of firm with respect to last year sales of the firm.IH= inventory held by firm during the year. = the misapprehension term3.4 statistical TechniqueTo examine the impact of sales growth on corporate borrowing, the multip le analog regression analysis (MLR) as a statistical technique was used for analyzed research study over selected sample firms the SPSS software was used to test the secondary data. bigeminal Linear backsliding Analysis technique was used for presage of sales growth with respect to last year sales and inventory hold by firm defined as the canvas variables had an impact on corporate borrowing decision especially on short term financing. The identify technique was used to analyze the empirical behavior of firms financings with canvas in capable variables (sales growth and inventory hold) on dependent variable i.e., Corporate Borrowing (short-term financing discussed in the prior chapter).According to the characteristics of research study and variables used in this study, the multiple linear regressions a multivariate analysis was appropriate to used than univariate investigation. In such a way the cite studies also suggested to use the multivariate analysis technique. The bras hness of sales growth impact on corporate debt during year 2005-2009 was observed on the basis of analyse freelance variables i.e. sales growth and inventory hold by firm during the year.CHAPTER 4RESULTSAll firms of cement industry listed on KSE-100 Index were selected as sample for this research study, and Multiple Linear Regression Analysis was taken as a statistical technique for analysis of this research study. This research was tested and analyzed by using multivariate technique for the prediction of impact of the sales growth with respect to last years sale and inventory hold by firm on corporate borrowing decision especially on short term financing. The identify technique was used to examine the impact of the canvas separate variables (sales growth and inventory hold) on dependent variable i.e., Corporate Borrowing (short-term financing discussed in the previous chapter).4.1 Findings and InterpretationPrimarily, the regression technique in SPSS was applied on cool data. The resulted output of data showed that the data has no multicolinearity issue, while the normality issue was found in the data, to resolve normality issue of the data so all the transformation techniques were used. By applying all the transformations, the studied variables found to be insignificant, so it was described that the data was highly vapourisable in Pakistani market so the normality issue was ignored to predict the variables. As the multicolinearity issue was not in the data, so the study initiated to analyze the results. The analysis and interpretation of the results was defined in following divide of the research. dining table 4.1 framework SummaryModelRR square upfamiliarised R Square1.722.521.510Table 4.1 demonstrated summary of the regression model. The Adjusted R square was best for prediction of model as per the deed of variables used. The Adjusted R square of 51% in the above table showed that the both of the predictors of corporate borrowing combined togeth er explained 51% magnetic declination in whole model, while the remaining was sleep variance as latent and not included in the prediction of the model. In other words, Adjusted R square showed that 51% vicissitude in progeny was explained by the population of the study.Table 4.2 ANOVAModelSum of SquaresDf incriminate SquareFSig.1Regression3.766E821.883E847.289.000Residual3.464E8873981969.306Total7.230E889The table 4.2 represented the conditional relation of estimated linear model of the study, the sig value of ANOVA supported the model fittingness for this research study file regarding applicability of the regression technique, ANOVA table was consistent for tryout of the models ability to predict any variation in observed dependent variable such that corporate borrowing. This was absolutely understandable from the sig value of .000 which showed that the linear regression model was perfectly momentous for the conducted research.Table 4.3 CoefficientsModelUnstandardized Coeff icients like CoefficientstSig.Collinearity StatisticsBStd. ErrorBeta marginVIF1(Constant)1082.629295.5253.663.000Inventry7.5431.179.5936.399.000.6411.561SG.307.152.1882.026.046.6411.561The table 4.3 represented crucial results for regression model of this study. Sig newspaper towboat of above table demonstrated that all variables of the study were significant and all independent variables of the guessing of this research study had significantly influential intensity over dependent variable of the study. Sig column demonstrated that the un-standardized coefficients of variables is nothing or not when the sig value was higher or satisfactory to .05, the un-standardize coefficients considered as zero and when the sig value was deject than .05, then the un-standardize coefficients of the model was not considered as zero. The value of column B demonstrated that one unit varies in independent variable way out change in dependent variable with the weights equal to the weights of col umn B. The VIF column showed the existence of multicollinearity issue in the studied independent variables. As all of the VIF values found less than 2, so this identified the least refreshing level of multicollinearity in the study.4.2 Hypotheses opinion SummaryThe studied hypothesis was sales growth of the firm has significant compulsive impact on corporate borrowing decisions to finance in short-term credit market. The firms sales growth characteristics had variation in current year sales of firm with respect to last year sales and the level of inventory hold by firm during financing years. In this study each of the sales growth variable and inventory variable as firms sales growth characteristic for corporate borrowing were tested and concluded in the outcome.TABLE 4.4 Hypotheses Assessment SummaryS.NO.HypothesesSIG.RESULTH1There is a imperious impact of sales growth on corporate borrowing.0.307.046AcceptedH2There is a positive impact of inventory hold on corporate borrowing .7.5430.000AcceptedCHAPTER 5 DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH5.1 ConclusionThe results of the study suggested that sales growth has positive impact on corporate borrowing which identified the significance of sales growth impact in Pakistani market. The second variable of the study was also identified the significance impact in Pakistani market and had intensity to impact over corporate borrowing. The results of this study were not matching with referenced studies conducted by Guedes Opler (1996), and these results had also shown consistency with the study conducted by Barclay et al. The studied results varying because the matched studies were conducted in various countries, so the firms environments and passel of the countries usually differed to give rise financing decisions accordingly.5.2 DiscussionsFirm sales opportunities played a vital role in defining the firms sales growth but these growth opportunities varied over volatility in environmental gr owth of the countries, hence, this dilemma was not with the study of Guedes Opler (1996), because in his study the level of inventory hold by the firm over the year was playing a significant role. Variations in the corporate borrowing were highly explained by the level of inventory held by firm over the year. While sales growth of the firm concluded same results with consistent to the research study of Barclay et al.5.3 Implications and RecommendationsThis research study was expressage to the cement sector firms listed on Karachi Stock Exchange of Pakistan only. The data was taken from annual reports of all cement sector firms. This research suggested it was not indispensableness that only firms sales growth has impact on corporate borrowing or the corporate borrowing decisions was affected only by sales growth and inventory factors such type of other borrowing factors should be carried out and analyses in other countries of the Asia as well, as to have inclusive idea about the im pact of sales growth on corporate borrowing. Furthermore, the research study also suggested that other factors of corporate borrowing discussed in the chapter one should be researched as to have perfect idea for the debt financing decisions of the firm. For instance, this research study can also be replicated efficiently in other developing countries.5.4 Future ResearchThis research study may helped various management of the firm, investors and other research conductors in analyzing and observing the debt behavior and financing decisions of firms to achieve sales growth opportunities of the firm. The students whose designing is to research on either debt financing behavior of the firm or to study the growth behavior of the firm with respect to debt can be benefited by this study. Furthermore, the cement sector will become advantageous from this study because the study clarifies the impact of sales growth of firm on corporate short term borrowing.CHAPTER 6REFERENCESAuerbach Alan (1 979). Share valuation and corporate equity policy. daybook of mankind Economics, 11, 291-305.Barclay, Michael J., Clifford W. Smith Jr. (1995). The maturity structure of corporate debt. journal of Finance, 50, 609-631.Barges A. (1968). InstituteGrowth grade and Debt Capacity. Financial Analysts Journal, 24, 100-104.Brick, Ivan, and Ravid S. (1985). On the relevance of debt maturity structure. Journal of Finance, 40, 1423-1437.DeAngelo, H., and Masulis R. (1980). Optimal nifty Structure under Corporate and Personal Taxation. Journal of Financial Economics, 8, 3-29.Study on the Determinants of Corporate BorrowingStudy on the Determinants of Corporate BorrowingCHAPTER 1The determinants of corporate borrowing was an empirical research, hence a terrific amount of prior researches focused on exploring the determinants of corporate borrowing, since 1960s. Corporate borrowing decision effects remained as an area of growing interest for researchers in the last three decades, as the pres ence of the a phenomenon has been evidenced even in the most developed capital markets of the world (Guedes Opler, 1996). In addition, the sales growth was defined as a pinpoint determinant for firm financial decision towards firm sales growth opportunities and financial debt capacity, in the same studies.The debt and equity remained main areas of interest which were observed for decision making in corporate finance of the governance systems. As the earlier researches explored the factor of debt maturity but usually did not focus on sales growth as determinant of corporate debt (Myers Stewart, 1977). In addition, the same study focused on including and exploring the sales growth of firm as a determinant of corporate borrowing.Firms, in general, financed projects with long-term debt to avoid riskiness of project and hide the mismanagement activities under the cash flow of project, the cash flows were obtained from investment of the project before the debt maturity date (Guedes Opl er, 1996). While same studies further addressed an important issue for firm, if the projects were financed with short-term debt. For instance, according to Barclay, Michael, Clifford and Smith (1995) that the term and conditions for maturity of debt of firms were reduced with growth opportunities, and raised with the size and credit quality of firm. Myers and Stewart (1977) also suggested firms to shorten debt when cost of contracting was high.Firms activities to finance long-term debt, with aspect to attaining firms growth opportunities such sales growth had significant impact on short-term debt of the firm due to increased level of inventory and level of failed to sustain receivables turnover (Stohs, Mark Mauer, 1996). Further, the same studies defined that less risky and probably larger firm used long-term debt financing with meager growth opportunities, so the liquidity risk was highly involved for firm short-term borrowing decision. According to Diamond and Douglas (1991a) deb t risk was defined as the borrower risk or the ability of borrower to repay interest, principle amount and timely fulfill claims terms.Froot, Kenneth, David and Stein (1993) addressed that loss of projects could be a caused by short-term debt if project has high refinanced interest rate and imperfections of credit market. Firms also experienced the distress for indirect cost of financial such that loss of inventory or the incremental proportion of inventory held and decline in the receivable turnover for the purpose of firm sales growth. Rizzi and Joe (1994) addressed the sales growth and risk that only high quality firms were able and sustained in the credit market for long term borrowing, while the low quality firm screened out from long term debt market. While the available short term debt market had high risk for low quality firms, even that firms financed to cope up growth opportunities, usually firms growth opportunities were identified with sales growth of the firm.1.2 Proble m StatementThe debt financing was considered as one of the crucial issues in the corporate financing, the sales growth of the firm was one of the major determinants of the corporate debt financing. The purpose for the study of sales growth and debt financing is that this is the crucial issue for firms that how efficiently to avail firms growth opportunities such that sales growth. The objective of this research study was to explore and know that how borrowing decision of the firm such that short term debt was affected by the sales growth of the firm.The fundamental purpose of study was to observe the impact of sales growth in detail by Guedes and Opler (1996) and Saumitra (2002) presented the detailed information regarding the determinants of corporate borrowing such as sales growth and the firm debt financing decision in Pakistan. The scope of this study was to analyze the impact of sales growth on corporate borrowing such that short term debt financing decision of the firm to avai l growth opportunities of the firm on the basis of debt financial decision factors.1.3 HypothesesThe central query was raised in front of firms to borrow new financing as cope up the growth opportunities of the firm in the form of sales growth opportunities. New investment was required for the operational and the manufacturing activities of the firm whether to use debt financing or not, if the debt financing decision was to be used so the lender and borrower noticed that at what level of risk and the sales growth of the firm may affect the short term debt financing decision. In selection of the financing decision firms past, current and expected activities was crucial for lender and borrower, such that sales growth, inventory held, and liquidity condition of the firm. Many Authors as Guedes and Opler (1996) and Saumitra (2002) discussed the sales growth as a main factor affecting to debt financing decision of the firm in research. The Hypothesized relationship of the variable is pro vided belowH1 There is positive impact of sales growth on corporate borrowing.H2 There is a positive impact of inventory held on corporate borrowing.1.4 Outline of the StudyThe research presented the introduction of the thesis in chapter one, which included the problem statement of the study, scope of research, hypotheses etc. Literature review of the study was presented in chapter two with review by different authors on impact of sales growth on corporate borrowing. The research methodology was described in chapter three with justification of the selection of variables, sample size, sampling technique and statistical technique used in analysis of the study, and also developed model were described. After processing of data, the analysis interpretation of the results was described in the chapter four with hypothesis assessment summary. The summarized findings, conclusion, discussions, implications and recommendations, and suggested future directions for the empirical research on impa ct of sales growth on corporate borrowing was defined in chapter five. References and appendixes for the study were given in chapter six and at the end of study respectively.Chapter-2LITERATURE REVIEWA lot of research has already been conducted in the field of identifying the best determinants of Corporate Borrowing by various researchers. Most of the research work suggested that the corporate borrowing vary from company to company and as well as from decision factor to factor.Marsh (1982) addressed that the borrowing decisions were taken by firms both by raising debt or finance, here question raised for corporation, what level of financing is required and which financing decision would be better for firm health. The firms borrowing decisions biased over its target level of debt, if its debt was below the target level of debt, so, the decision of debt financing would taken, otherwise financing decision was taken by firms due to signal of existing level of borrowing was above its ta rget level of debt. The significant flotation costs for existence of corporations means that companies required to plan issues with objective to minimize both costs of its target ratio deviation and flotation costs. Over time fluctuating, it gave rise to infrequent issues of firm with its targeted debt ratio and firms clearly identified that what its level of target is.Miller and Rock (1977) debated over debt and explained two points first, shift issue occurred in firm decision towards either equity or debt due to any change in level of tax, hence issue effect either temporary lasting until equilibrium level was restored, or shift issue remained permanent over target ratio of firms. The second point were elaborated that the probability of firm financial distresses and systematic risk level influenced the target debt levels of firm, it was defined that the highly operating risk of firm used the less level of debt financing.Myers, Brealey and Schaefer (1977) argued that companies avoi d fixed interest rate of long term debt due to uncertainty of future rates of inflation and instead of long term debt rely over variable rate of short term debt. Barges (1968) explained the ability of a firm towards sales growth rate and capacity of debt, the explanation were shown with two factors, first the expected growth rate of future earnings of firm and the probability of expected sales growth and earnings of firm. Generally, high rate of expected future earning signify a greater capacity of a firm to carry debt hence low expected future earnings mean the opposite. The degree of uncertainty for any level of expected future earnings for debt capacity of firm was served by knowing a limiting factor.Barclay et al. (1995) showed that credit quality and size moderately effect on firms to augment its debts term to maturity, and firms debt falls with growth opportunities. In a related article, Stohs et al. (1996) defined that larger firms most likely used the long term debt to avail the growth opportunity of its sales.The earlier studies examined the corporate debt maturity on behalf of issues of incremental debt rather than to investigate the maturity of liabilities of firm on balance sheet. By studying the liabilities to assets on balance sheets could answer some uninvestigated questions about impact of sales growth on corporate borrowings.Myers et al. (1977) suggested that agency cost and problems of debt can be controlled by firm to shortening the worth of its debt with respect to the volume of its sales. While some firms gain incentives from liquidity risk to borrow long term debt, it may not be able to compensate investors to bear credit risk of long-term debt for the sake of sales growth it may indicate the low quality projects (Diamond Douglas, 1991.) and (Stiglitz, Joeph Weiss, 1981). Hence the low-quality firms cant sustain their position or can be screened out from long-term debt market, only high credit quality firms can be durable and able to b orrow long-term debts. In contrast, larger firms were defined for long run as having higher likely possibilities to survive than smaller firms (Queen, Maggie Richard, 1987).Brick, Ivan and Ravid (1985) examined that interest payments affect the borrowers and lenders with respect to firms volume of sales due to different time patterns. The interest text shield was argued that borrowers seek to maximize the present value by accelerating interest payments, while lenders priorities to diminish the present value of tax charges by slow downing interest payments.Leff (1979), Khanna and Palepu (2000) addressed that the dominant perspective and minimizing perspective of transaction costs on business groups plays a crucial role on firms affiliations with these groups to overcome the barriers in an inefficient market. The view of transaction cost minimizing is characterized by weak governance system of firms, in part due to weak legal institutions or under developed intermediaries. Increase i n the external financing investment cost may occur due to association of agency cost problems with market imperfections. However, this study will not develop and test the hypothetical views of business groups.Mitchell (1991) finds no support on the firm choice to match their asset maturities with maturity of debt issues. In a similar on debt issues, Guedes and Opler (1994) argue that high grade firms with large investment issue short-term debt. Diamonds (1991) predicted that active participants part in short-term credit markets was taken by the higher-rated firms to avail growth opportunities of the firm.Auerbach and Alan (1979) also argued that growth rate of sales and leverage are inversely proportion because the interest payment of tax deductibility was considered less valuable to the larger or fast growing firms. The firms annual sales growth rate in total assets was used as a growth rate of proxy.Asset maturity was defined as an important factor for corporate borrowing and play s inactive role to predict the debt maturity of a firm. Myers et al. (1977) argued that long-term assets of firm can support to gain more long-term debt. In contrast, Titman, Sheridan and Wessels (1988) analyzed debt maturity on the basis of balance sheet and viewed the evidences that smaller firms rely on higher proportion of short-term debt with objective to minimize long-term debt flotation costs. Barclay et al. both addressed that smaller firms more likely with growth opportunities rely on a smaller proportion of debt that would exceeds 3 years. Myers and Stewart (1977) expressed the views on these evidences that debt maturity is used by firms to control interest conflicts between debt and equity holders.The preceding papers provided useful approaches for firms debt maturity choices hence the measure had various limitations. First, the term-to-maturity in the corporate borrowing provided the information just about incremental financing choices. The debt maturity average of the firms existing liabilities test relate to the terms-to-maturity of debt issues to balance sheet variables such as asset maturity or return on assets (Stohs et al. 1996).Myers et al. defined the borrowing decisions of firms by using two indicators for growth sales growth and growth of firm total assets. The research study focused to examine the behavior of firm borrowing decisions and concluded that to prevent the agency cost of long term debt, most of the firms proffer short term debt decisions instead of long term debt. While Froot et al. (1993), Lucas, Deborah and McDonald (1990), and Kale, Jayant and Thomas (1990) examined the firm growth with three indicators of growth sales growth, growth of firms total assets and growth of employing size of firm, and concluded that firm growth is independent of firm size. To study firms complete size distribution, the several alternative forms of samples were used, so, the variables were leading each others, while the definite relationship for alternative form of samples were crucially assumed and it was derived that firm growth decreases with all three indicators for agency cost of long-term debt financing, hence the sales growth were certain.Loughran, Tim, Ritter J. (1995) accentuated the importance of firm growth, debt financing decision and changes in market structure. Mansfield addressed that debt financing is better when growth opportunities of firm were available and demanded, so the profitability of firm was certain and debt financing was benefited as the tax advantage of firm.DeAngelo and Masulis (1980) examined the financing decisions of firm and showed that firm value was being affected by the financing decisions of the firm, if the firm has to avail certain growth opportunities, so the debt financing decisions was defined as an effective tax advantage and resulted decline in non-debt tax shields. Firm financing decision except debt financing resulted without tax shield beneficiaries, debt interest and princi ple payments were excluded from earnings of firm before tax applied and included the net short term losses in taxable income and then the corporate taxes was being applied over taxable income. Hence it was addressed that the profitability of firm and the proportion of profitability over assets was affected by the corporate tax.Gan (2007) addressed to normalize the loan payment balances of prior debts and lending decisions. It was explained that the payment of debt balances of loans slowly and present value of generated profits exceeded the present value of total payments which were gradually paid. It has also an impact over firm capital and the proportion of debt over capital, the ratio of firms capital was reduced with the excess of debt. Firms health with proportion of debt to capital explained that healthy capital was being shown from the borrowers willingness to repay gradually loan payment, and lenders willingness to lend. Debt financing and loan payments has also an impact ove r firm net profitability and the proportion of net earnings over firm total assets or return on assets, it must be paid even in bed time of firm, so well, required payments reduces the firm profitability and return on assets. The proportionate of earnings over total assets showed the efficiency of firm that how well the firm has utilized its assets to bear the cost of financing. Return on assets and prior debt to capital worth was used by means of lenders amount and implicitly measure the worthiness of firm capital. Dedoussis and Afroditi (2010) argued the problems with characteristics of a firm such as assets value or growth opportunities were communicated inability of firm to outside lenders, so that investment decisions were affected by net worth of firm if the discrepancy exists between firm internal and external financing.Hayashi (1982) explained that marginal profitability was covered by firms to expanding the business and sales of firm with bearing the moderate changes in fir m expenditure. The described expansion were done by corporations with various financing decisions, it was suggested that the debt financing is better to avail if the market was shown under green signals of demand, if the markets demand were not shown so the firms prevent the debt financing because of interest payment which must be paid even in bad time of cash flows.Hadlock (1998) assumed that financiers were indecisive about the factual value of firms assets, so expectations were formed based on the investment amount that firm requests to carry out. If the firm requested for the maximum amount subsequently the investors were not capable to discriminate between firms with large resources or low resources. So the large assets of firm with low claims send a green signal to investor to putting money for debt investors. While it send the signal to equity provider to cutting the amount of investment if the money is required for new project establishment because it shorten its net earning s as well as the earning of shareholders.CHAPTER 3RESEARCH METHOD3.1 Method of Data CollectionData was obtained from the website of Karachi Stock Exchange KSE-100 Index and Joint Stock Companies Balance Sheet Analysis specified by State Bank of Pakistan in periodical listed on the KSE (2004-2009). The period of study covered with data of five years as sample of 2005-09. The opted sample size of all cement sector firms was taken from Karachi Stock Exchange-100 Index and the firms whose data were not available in the sample year of 2005-09 were excluded from the study. The objective behind the insertion of the firms in the sample was to explore debt financing behavior of cement firms significantly rely over sales growth opportunities or not.The major issue of data availability was faced in this research. The source of secondary data was adopted for the sampled data collection of this research study. In accordance with the research studies limitations three firms of cement sector were excluded from the study because two of the firms were newly listed and introduced in the Pakistani market and third was dropped from the KSE-100 Index during sample years of the study.The observed and expected aspects regarding the sales growth and debt financing was analyzed in this research. The external data sources were used to cope up the purpose of collection of data, such that general business publications, State Bank of Pakistan, companys annual reports, internet publications and books were used. The data required for study was completely dependent over the published and secondary data sources, as the sources defined above.3.2 Sample SizeThe study selected all cement sector firms listed over KSE-100 Index as sample size for the research analysis. Total of 21 firms were listed over KSE-100 Index, hence, the firms whose data was not available during the sample year of 2005-2009, were excluded from the study, therefore three firms were excluded from the study because two of the excluded firms were newly listed and third was delisted over KSE-100 Index during the sample years. The impact of sales growth of firms on the corporate debt, which were listed on KSE-100 Index, was analyzed on the basis of the selected sample of 18 cement firms.3.3 Research Model DevelopedFrom the various determinants of corporate debts which affected debt financing decision of the firms, this research study included only sales growth and inventory to analyze the impact of sales growth on corporate debt, the sales growth was measured by two variables one was directly change of current year sales with respect to last year sales, and second was level of inventory held by firm. The short term debts were used as a major dilemma for firms to face debt claims in swift time. The constructed mathematically model provided belowCD = a0 + 1SG + 2IH + WhereCD= corporate debt was measured as the change of short-term debt with respect to last year debt.SG= sales growth of firm with respect to l ast year sales of the firm.IH= inventory held by firm during the year. = the error term3.4 Statistical TechniqueTo examine the impact of sales growth on corporate borrowing, the multiple linear regression analysis (MLR) as a statistical technique was used for analyzed research study over selected sample firms the SPSS software was used to test the secondary data.Multiple Linear Regression Analysis technique was used for prediction of sales growth with respect to last year sales and inventory hold by firm defined as the studied variables had an impact on corporate borrowing decision especially on short term financing. The identified technique was used to analyze the empirical behavior of firms financings with studied independent variables (sales growth and inventory hold) on dependent variable i.e., Corporate Borrowing (short-term financing discussed in the previous chapter).According to the characteristics of research study and variables used in this study, the multiple linear regre ssions a multivariate analysis was appropriate to used than univariate investigation. In such a way the referenced studies also suggested to use the multivariate analysis technique. The intensity of sales growth impact on corporate debt during year 2005-2009 was observed on the basis of studied independent variables i.e. sales growth and inventory hold by firm during the year.CHAPTER 4RESULTSAll firms of cement industry listed on KSE-100 Index were selected as sample for this research study, and Multiple Linear Regression Analysis was taken as a statistical technique for analysis of this research study. This research was tested and analyzed by using multivariate technique for the prediction of impact of the sales growth with respect to last years sale and inventory hold by firm on corporate borrowing decision especially on short term financing. The identified technique was used to examine the impact of the studied independent variables (sales growth and inventory hold) on dependent variable i.e., Corporate Borrowing (short-term financing discussed in the previous chapter).4.1 Findings and InterpretationPrimarily, the regression technique in SPSS was applied on collected data. The resulted output of data showed that the data has no multicolinearity issue, while the normality issue was found in the data, to resolve normality issue of the data so all the transformation techniques were used. By applying all the transformations, the studied variables found to be insignificant, so it was described that the data was highly volatile in Pakistani market so the normality issue was ignored to predict the variables. As the multicolinearity issue was not in the data, so the study initiated to analyze the results. The analysis and interpretation of the results was defined in following section of the research.Table 4.1 Model SummaryModelRR SquareAdjusted R Square1.722.521.510Table 4.1 demonstrated summary of the regression model. The Adjusted R square was best for prediction of model as per the number of variables used. The Adjusted R square of 51% in the above table showed that the both of the predictors of corporate borrowing combined together explained 51% variation in whole model, while the remaining was residual variance as latent and not included in the prediction of the model. In other words, Adjusted R square showed that 51% variation in outcome was explained by the population of the study.Table 4.2 ANOVAModelSum of SquaresDfMean SquareFSig.1Regression3.766E821.883E847.289.000Residual3.464E8873981969.306Total7.230E889The table 4.2 represented the significance of estimated linear model of the study, the sig value of ANOVA supported the model fitness for this research study file regarding applicability of the regression technique, ANOVA table was consistent for examination of the models ability to predict any variation in observed dependent variable such that corporate borrowing. This was absolutely understandable from the sig value of .000 which showed that the linear regression model was perfectly momentous for the conducted research.Table 4.3 CoefficientsModelUnstandardized CoefficientsStandardized CoefficientstSig.Collinearity StatisticsBStd. ErrorBetaToleranceVIF1(Constant)1082.629295.5253.663.000Inventry7.5431.179.5936.399.000.6411.561SG.307.152.1882.026.046.6411.561The table 4.3 represented crucial results for regression model of this study. Sig column of above table demonstrated that all variables of the study were significant and all independent variables of the hypothesis of this research study had significantly influential intensity over dependent variable of the study. Sig column demonstrated that the un-standardized coefficients of variables is zero or not when the sig value was higher or equal to .05, the un-standardize coefficients considered as zero and when the sig value was lower than .05, then the un-standardize coefficients of the model was not considered as zero. The value of column B demonstrated that one unit varies in independent variable consequence change in dependent variable with the weights equal to the weights of column B. The VIF column showed the existence of multicollinearity issue in the studied independent variables. As all of the VIF values found less than 2, so this identified the least acceptable level of multicollinearity in the study.4.2 Hypotheses Assessment SummaryThe studied hypothesis was sales growth of the firm has significant positive impact on corporate borrowing decisions to finance in short-term credit market. The firms sales growth characteristics had variation in current year sales of firm with respect to last year sales and the level of inventory hold by firm during financing years. In this study each of the sales growth variable and inventory variable as firms sales growth characteristic for corporate borrowing were tested and concluded in the outcome.TABLE 4.4 Hypotheses Assessment SummaryS.NO.HypothesesSIG.RESULTH1There is a positive impact of s ales growth on corporate borrowing.0.307.046AcceptedH2There is a positive impact of inventory hold on corporate borrowing.7.5430.000AcceptedCHAPTER 5 DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH5.1 ConclusionThe results of the study suggested that sales growth has positive impact on corporate borrowing which identified the significance of sales growth impact in Pakistani market. The second variable of the study was also identified the significance impact in Pakistani market and had intensity to impact over corporate borrowing. The results of this study were not matching with referenced studies conducted by Guedes Opler (1996), and these results had also shown consistency with the study conducted by Barclay et al. The studied results varying because the matched studies were conducted in various countries, so the firms environments and circumstances of the countries usually differed to make financing decisions accordingly.5.2 DiscussionsFirm sales opportunities played a vital role in defining the firms sales growth but these growth opportunities varied over volatility in environmental growth of the countries, hence, this dilemma was not with the study of Guedes Opler (1996), because in his study the level of inventory hold by the firm over the year was playing a significant role. Variations in the corporate borrowing were highly explained by the level of inventory held by firm over the year. While sales growth of the firm concluded same results with consistent to the research study of Barclay et al.5.3 Implications and RecommendationsThis research study was limited to the cement sector firms listed on Karachi Stock Exchange of Pakistan only. The data was taken from annual reports of all cement sector firms. This research suggested it was not necessity that only firms sales growth has impact on corporate borrowing or the corporate borrowing decisions was affected only by sales growth and inventory factors such type of other borrowing factors should be carried out and analyses in other countries of the Asia as well, as to have inclusive idea about the impact of sales growth on corporate borrowing. Furthermore, the research study also suggested that other factors of corporate borrowing discussed in the chapter one should be researched as to have perfect idea for the debt financing decisions of the firm. For instance, this research study can also be replicated efficiently in other developing countries.5.4 Future ResearchThis research study may helped various management of the firm, investors and other research conductors in analyzing and observing the debt behavior and financing decisions of firms to achieve sales growth opportunities of the firm. The students whose intention is to research on either debt financing behavior of the firm or to study the growth behavior of the firm with respect to debt can be benefited by this study. Furthermore, the cement sector will become advantageous from this study because the study clarifies the impact of sales growth of firm on corporate short term borrowing.CHAPTER 6REFERENCESAuerbach Alan (1979). Share valuation and corporate equity policy. Journal of Public Economics, 11, 291-305.Barclay, Michael J., Clifford W. Smith Jr. (1995). The maturity structure of corporate debt. Journal of Finance, 50, 609-631.Barges A. (1968). InstituteGrowth Rates and Debt Capacity. Financial Analysts Journal, 24, 100-104.Brick, Ivan, and Ravid S. (1985). On the relevance of debt maturity structure. Journal of Finance, 40, 1423-1437.DeAngelo, H., and Masulis R. (1980). Optimal Capital Structure under Corporate and Personal Taxation. Journal of Financial Economics, 8, 3-29.