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Journal of Business and Tourism

Editorial Board

Patron in Chief: Vice Chancellor, Abdul Wali Khan University, Mardan

Chief Editor: Prof. Dr. Qadar Bakhsh Baloch

Editor: Dr. Shahid Jan Kakakhel

Deputy Editors: Dr. Jehangir

Associate Editors: Dr. Adnan Khattak

Mr. Ihtesham Khan

Mr. Saqib Shahzad

Editorial Advisory Board

Dr. Shumaila Y. Yousafzai Cardiff Business School, College of Arts, Humanities & Social

Sciences, UK

Dr. Amjad Khan Northwestern Michigan College, U.S.A.

Dr. Sang-Ryong CHA University of Nagasaki, Japan

Prof. Dr. Samina Khalil Director, Applied Economics Research Centre, University of Karachi

Prof. Dr. Dileep Kumar University Institute for International and European Studies, Malaysia

Dr. Amira Khattak College of Business Administration, Prince Sultan University, Saudi

Arabia

Dr. Mansoor Akbar Kundi Former Vice Chancellor, Gomal University, D.I. Khan

Dr. Jan Muhammad Director, Institute of Management studies, University of Balochistan

Dr. Saleem Ullah Khan Director Academics, Abdul Wali Khan University, Mardan

Dr. M. Shaukat Malik Director, Alfalah Institute of Banking and Finance, Bahauddin

Zakariya University, Multan

Dr. Zeeshan Khattak Director, Institute of Business Studis, KUST, Kohat

Table of Contents

S.No Title of Research Article Pages

1 Impact of Capital Structure on Firm Performance: A Case Study of Textile Industry of

Pakistan (2004-2014)

Ihtesham Khan, Majid Kamal, Dr.Adnan Ahmad and Dr. Jehangir

1 – 16

2

Analyzing the Effect of Information Technology SAP (System Application Product)

on Public Sector Organization’s Performance: (A Case Study Of Accountant General

Khyber Pakhtunkhwa Office Peshawar)

Yasir Khan and Dr. Saima Batool

17 - 23

3

The Effect of Authentic Leadership on Job Outcomes and Organizational Innovation:

The Mediating Role of Psychological Empowerment

Imran Saeed, Hidayat Ullah, Ghayyur Qadir and Saif Ullah Khan

24 – 40

4

National Holiday Anomaly in Pakistani Stock Market: Evidence from Karachi Stock

Exchange KSE 100 Index

Muhammad Nabeel, Qazi Sikandar Hayat and Muhammad Daud Ali

41 –57

5

Factors of Employee’s Well Being and its Impact on Employee’s Turnover Intention and

Organizational Commitment: A Case Study of PTCL, Peshawar

Muzammil Rehman, Saqib Shahzad, Zunnoorain Khan and Hamza Khwaja

58 – 66

6

The Impact of Capital Structure on Islamic Banks Performance: Evidence from Pakistan

Atta Ullah, Muhammad Ilyas, Ihtesham Khan and Muhammad Tahir Khan 67 – 76

7

Determinants of Foreign Direct Investment in Pakistan: A Comparative Analysis in

Democratic and Non-Democratic Eras

Yasir Khan, Alam Rehman and Farman Ullah Khan

77 – 85

8

Factors Influencing Individual Investors’ Behavior: An Empirical Study of Pakistan

Financial Markets

Shafiq Ahmad, Muhammad Ilyas, Muhammad Khan and Muhammad Tahir Khan

86 - 101

Journal of Business and Tourism Aims and Scope

Journal of Business & Tourism (JBT) is a double peer-reviewed, multidisciplinary research journal of

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Review Process: On receipt of a research article the process of Triple (blind) peer review shall be

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Copyrights © 2015, Abdul Wali Khan University, Mardan. All rights reserved

Published by Faculty of Business and Economics

First Print: Jan- June 2015, Mardan, Pakistan

mailto:[email protected]

http://www.awkum.edu.pk/jbt

Journal of Business and Tourism Volume 01 Number 01

January – June, 2015

Khan, Kamal, Ahmad & Jehangir 1 ISSN: 2520-0739

Impact of Capital Structure on Firm Performance: A Case Study of Textile Industry of

Pakistan (2004-2014)

IHTESHAM KHAN PhD- Scholar, Islamia College University, Peshawar

[email protected]

MAJID KAMAL

MBA student, Abdul Wali Khan University, Mardan

DR. ADNAN AHMAD

Assistant Professor, Abdul Wali Khan University, Mardan

[email protected]

DR. JEHANGIR

Assistant Professor, Abdul Wali Khan University, Mardan

[email protected]

Abstract

In this research study investigated the impact of capital structure on firm performance of five textile

sector firms in Pakistan during 2004-2014. From the analysis of the results demonstrate that the

impact of leverage on ROE is statistically positive and significant. Moreover, reveal that tangibility,

firm size and firm growth are negatively related with leverage. The results of this study justify the

static trade off theory which says that firms who have high leverage over equity in financing will have

high growth and profitability because of high interest on debt tax deductibility decreases.

Keywords: Capital structure, leverage, ROE.

1. Introduction

Every financial decision has a very important role in financial well fare/ wellbeing of the business. In

this study we are investigating how the capital structure decision that may be influenced by firm

performance. First we should know that what capital structure. Capital structure means how to finance

the operation by using different means of financing a firm. Capital structure depends upon the

issuance of debt, equity and hybrid security for the financing its assets to organized the operation. The

companies generate equity from issuance of preferred stock, common stock and retained earnings.

While debt is categorized into two parts the first one is long term debt and the second one is short

term debt. In long term debt we use bond, long term debt etc. and in short term debt we use short bank

loan, short term account payable etc. And the other one is hybrid security the firm may issue hybrid

security which has debt and equity. In a simple word capital structure is the combination of debt and

equity. If the company generate cash through debt section so there are some and few benefits for the

company first is tax shield and another is discipline manager (Jenson, 1986). Manager use free cash

flow for investing the project to paying the dividend so manager use free cash flow of the company to

finance in project and manager also use free cash flow to hold on the cash balance. The large firm has

more experienced to finance their financial resources as compare to small firm. Small firm having less

experienced managed make less efficient decision regarding capital financing which is harmful for the







firm. Financing is one of the crucial areas in an exceedingly firm. A finance manager is involved with

the determination of the most effective financing combination of debts and equity for his firm. Capital

structure decision is the mixture of debt and equity that an organization uses to finance its business

(Damodaran, 2001).The firm's assets are supported with a combination of common debt and equity, as

the capital structure of the firm. Capital structure decision is the important financial decisions taken

by a firm because the impact on the financial performance of the firm. Many research studies support

the existence of a positive connection the use of debt and profits. According firm Baker (1973), the

large amount of leverage means more risk and to rise if the capital supplier’s industry profit said rates

Heinkel (1982)If imperfectly have more information about insiders are informed or the right value of

the firm's debt financing and firm value would a positive association. Was found in a study by Ross

(1977) that Firms' financial structure point of data for the market and more Leverage indicates good

prospects for the future. Graham (1996) said the loan tax benefits are more likely to issue debt than

firms with low tax rates for firms with high marginal tax rates. Modigliani-Miller theorem on the

structure of financial irrelevancy Rolled assumes that the market is completes the firm’s activities.

Managers is owner to possess inside information, however, since an office reason (purpose) list of

detail and make a money business structure give an idea of information to the market and in

competition Signs will be outline inferences balance to verify. This principle means that an empirical,

in a cross-section, after the increase in the value firms, will raise with leverage increases the

perception of the market. Seeing corporate finance, the results Modigliani- Miller irrelevancy

propositions, are well summarized in the following Excerpts. The market price of any company is

independent of its capital structure and is given by Reasonable rate of profit expected by investors in

class Pak (Miller and Modigliani, 1958).

The present evaluation is not affected by difference in paying the payment Term future and the like.

Dividend policy is unrelated for determining the market Prices, the investment strategy (Miller and

Modigliani, 1961). Literature on capital structure factors on capital structure mainly focuses on the

words. Booth (2001) tested the inspection of ten capital structure determinants in developing countries

and concluded the structure of the firm's capital is the result of courses of the same variables in the

decisions of the firm’s structure decisions, capital economies developed economies are affected by.

Singh (2010) Specific capital firm and four developing countries and concluded that capital structure

decisions specific analysis of factors is developed in firm characteristic capital structure as well as

affected operates financial firm. A few studies have been led on the Capital Structure King and Hijazi

(2004), these studies have concentrated on distinguishing determinants of Capital Structure for non-

monetary firms in Pakistan. In any case, these studies have not analyzed the Capital Structure

influences the financial execution of the firm. Since a decision firm has utilizing the benefits of

obligation or value financing, the need to investigate how the organization financing blend influence

its budgetary execution.

In this paper we examine the effect of debt financing on Pakistan's financial performance in Textile

Company. Loan financing may be different for the relationship between different performances does

not assume monotony and financial leverage in formal level in a square shape to create a linear

relationship between the evaluations of the application and return ratio. Assets and debt-to-asset ratio

of debt to equity, the increase in equity until early in the loan repayment is reached then start

declining. We have chosen the textile business since it is most created industry in Pakistan Textile

business% (GDP) and financial records for 60 of GDP% Of Pakistan's exports. Furthermore, it

provides employment40% of the industrial workforce (for the government of Pakistan, 2013) the aim

to explore doubled study is relative. The financial performance of corporate debt and textile firms also

finding the best capital structure for these firms. Whatever remains of the paper is sort out as takes




after. The following segment describes the information and talks about the structure of the textile

firms think What Pakistan was trailed by a segment on model and estimation strategies. Next, we

exhibit the practical results. The last segment draws Results. Management and capital structure is an

increasing significant strategic issue for companies all over the world. Misstatements managers not

only to make the conclusions that the impact on the capital structure and may violate the matching

principle. Companies heavy manipulation of money and points, suffers from some kind of innocent

times robes shareholders, counting investors “all that glittered is not gold”. All resources are created

by sources as it is not directly linked with the capital structure of total assets the main sources of the

debt and equity. Equity shows the risk of economic weakness and the company's high debt ratio. It

also shows the debt and capital employed is financed by long-term liabilities percent. Managers of

earnings management will affect this ratio and to attract investors to develop their business windows.

Although Miller and Modigliani (1958) proved that there theory of Capital Structure of business firms

of wealth. The Capital Structure of the future economic benefits, long-term, the distribution of a

company's financial assets, long-term debt, including common stock, preferred stock and retained

earnings. Different mix of capital gives you different income. Managers can develop a legal and

legitimate ways to mix and manipulate it to achieve favorable results by making management.

Ownership capital structure and debt induction of changes can play an important role to prevent

management from the revenue management practices can be explained as the Capital Structure of a

company's specific short-term debt, long term debt and preferred equity and common equity last but

not least. Capital structure to its overall operations using diverse sources of funding and development

of a company is what the fund. Reducing the cost of funds and management as the firm more

manipulates the structure of its capital in this way.

1.1 Research Questions

What type of Capital Structure is adopted by textile sector in Pakistan?

What are the factors of Capital Structure in textile sector in Pakistan?

1.2 Objective of the Study

The major objective of this paper is examining the effect of capital structure on the performance of

firms in Pakistan. The exact objectives are the following.

To find that how the firm specific factors can be affected on the capital structure decision

(leverage) in textile sector of Pakistan.

Find the most important and significant factors/determinants which relate to leverage in the

sector of textile in Pakistan.

1.3 Statement of the Problem

One of the major issues encountered by fund managers today is not just procurement of funds but also

their meaningful deployment to generate maximum returns. Sources of funds are generally the same

across all businesses but then why is it that some businesses are able to do better than the rest. If the

logic of outstanding performance is a viable business idea, then why is it that some companies still

fail to achieve success even with ample funds and the right business idea? The above debate clearly

implies that there is something beyond financial success of business besides great ideas and good

geographic presence. Capital structure is one of the important determinants of a firm’s success. This

study aimed by analyzing the capital structure decision on the firm performance




1.4 Significance of the Study

This paper will try to determine associated analyze the determinants of capital structure in an orderly

method. The study will provide workable and practical instruction for anyone who wants to

understand the theme. Usually will cover many aspects of the theme of this particular study, but will

try to define the capital structure of the textile enterprises registered on the Karachi Stock Exchange.

This research will help managers make decisions financing for these firms. Creditors funding firms in

a particular sector can take advantage of to minimize their risk.

1.5 Scope of the study

There are many fields in Karachi stock exchange such as agriculture, forestry, fishing, food services

activity, banking, insurance activity fuel and energy, motor vehicles and etc. Though due to time

constraint this study just spotlight on textile sector for the period from 2004 to 2014

2. Literature Review

According to trade-off theory a large firm have expert with special knowledge business managers So

that they can easily diversify risk and have a lower level of default risk as compare to small

companies. Large companies tend to use debt in financing setup investment. Trade-off theory

maintains there is a positive association amongst firm size and leverage. Their agency cost of debt is

at a lower level and large firm are more credible in money markets. Thus large

sized companies are was looking on as to come to intensively use debt (Rajan, 1995). Rafiq (2008)

performing the research on determinants of the capital structure of the chemical sector in Pakistan. He

used penal data for the period of 12 years from 1993 to 2004. He found that profitability, non-debt tax

shield, size of the firm, income variations and firm growth are the major determinants of capital

structure in chemical sector of Pakistan. Frielinghaus (2005) South African companies, the option of

pre-stages for the insiders maintain that support more debt in the early stages. They conclude that this

bill is the right approach. Beattie. (2006) that are not publicly traded determine the most targeted

leverage ratio of small and medium sized UK firms find you. On the other hand, the large size seems

to be that big a target leverage ratio specified in the number of firms. The Grundströmer and

Gustafson (2007) on financial flexibility as the most important factors affecting trade in Swedish

company’s capital structure decisions publicly, reporting capability and long-term credit rating.

Serkan (2011) Find a significant association between firm size and common stock issues. He added

that celebrated a significant relationship between firm size and personal loans. However, the setup

cost, financing for ongoing operations and future investment priorities seem to be independent of firm

size. In addition, there was a hierarchical preference for internal resources, debt and common stock

issues. Sources of financing are compatible with the pecking order theory of sequential order. Other

results are also connected with the validity of the packing order theory in explaining the capital

structure of Turkish companies. Trade off theory maintains close positive relationship between firm

size and leverage. Big companies money and debt markets reliable cost of the agency at a lower level.

Thus, large companies are expected to constrict credit (Rajan, 1995). On the other hand, the pecking

order theory suggests that large companies are quite low levels and equity sources. As a result, they

are disposed to use retained earnings as the main financing source. Any additional financing needs are

met by debt and common stock issued in the last step (Frank, 2003). Leverage and firm performance

can be divided into 2 teams. This is supported information asymmetries. Signaling Ross (1977) came

up with a model that outlined criteria regarding the choice of debt-to-equity quantitative relation by a

firm need to send the sign signal. As a result firms borrow less money than quality and increase the

firm value of leverage with a similar model was established by Leland and Pyle (1977) wants to share




high quality manager, manufacturing manager is to get the attention of high finance. Having a firm

will end with the lower risk debt that's why. The association between firm performance and capital

structure over the agency cost of another group studies (Jensen &Meckling, 1976; Myers, 1977).

Agency costs are associated to conflicts of interest among different groups of agents (managers,

creditors, stockholders).There are two types of agency problem might be r elated.

2.1 Agency problem between directors and stockholders

It arises whenever managers own less than 100% of shares of firm’s assets due to unwillingness of

managers to do their best in order to maximize firm value (which is preferable for shareholders).

Jensen (1986) considered benefit of debt as a restriction of managerial discretion and stated that “the

problem is how to motivate managers to disgorge the cash rather than invest it below the cost of

capital or waste it on organizational inefficiencies”. Managers of low-indebted firms are inclined to

spend free cash flows more freely, thus taking less effective projects and generating lower return. In

the opposite situation, when a company has debt in its capital structure, managers are committed to

make interest payments, thus having less free cash flow left and choosing a more effective way to

distributing these cash flows. An alternative point of view is that shareholders delegate some part of

their control over managers to debt holders, giving possibility to evaluate firm performance to capital

markets.

2.2 Agency problem between stockholders and bond holders

The issue is that this type of reasonable distinction among investors and debt holders. I agree with the

latter and to reduce the risk of low returns, while the former, taking risks demand higher and higher

returns. Therefore, we prefer shares will give holders debt holders want to projects with high risk. All

debt holders and investor losses Meckling and Jensen, (1976), will earn additional returns. As a result

more obliged firms with minor risk projects. On the other hand, Myers (1977) may be

underinvestment debt holders and shareholders contradictions between the goals that have appeared.

As a result he can lead to poor corporate performance with high leverage.

2.3 Theoretical Discussion on Capital Structure

We represent and have some theoretical need to test potential determinants of leverage stage. The

significance of making a decision regarding the capital structure of the first He proved that by

Modigliani in 1958 and published by Miller (MM), No tax in the world, is not affected through the

leverage of the firm. In the field made by MM important task after a few studies have made

assumptions. Indeed, the benefits of MM hypothesis great appreciation of the benefits of the ideal

capital structure in an appreciation companies to back and should not stable, explains the empirical

results on the capital structure. Then, after such criticism, they include corporate tax element and

reviewed their Capital structure theory Model 1963. Profit and publish a new article, published Miller,

in 1977 another article includes corporate tariff and individual income tax models. According to MM

theory, subject to a maximum capital structure of the loan tax benefits and why Firms Consists almost

entirely of the loan should have a capital structure. However, in this present reality firms In general

obligation to utilize due to its high debt moderate amounts of loans for bankruptcy costs. After MM

Theorem, they developed the fundamental theorem of capital structure.




2.3.1 Agency theory of Capital Structure

Jensen and Mackling (1976) conduct the agency theory agency theory recommends that the managers

(agent) are given power by the shareholders (the principal) to deal with the firm in a path by which

company's welfare and shareholder's riches are expanded. Specifically, the supervisors don't generally

act in light of a legitimate concern for the shareholders in which the chiefs can embrace a pioneering

conduct and advantage them from accomplishing their own self-centeredness that may put the firm at

danger. In the end, accomplishing the objective of augmenting the estimation of the firm regularly

gets to be unattainable. Such an irreconcilable circumstance will make office issues and expenses. As

per Jensen and Mackling (1976), an individual will work harder for a firm on the off chance that

he/she claims a huge rate responsibility for organization than if he/she possesses a little rate. In any

case, when chiefs hold a critical bit of a company's value, an expansion in administrative possession

may prompt an expansion in administrative advantage and in this way may bring about lower

obligation. Also, Jensen and Mackling (1976) contend that directors maintain a strategic distance from

influence to decrease the danger of corporate chapter 11 and exchange of control to bondholders. The

misfortune to supervisors from chapter 11 is conceivably more noteworthy when administrators hold

bigger proprietorship. Grossman and Hart (1982) recommend that the utilization of obligation

expands the odds of chapter 11 and employment misfortune that further rouse directors to utilize the

authoritative assets effectively and diminish their utilization on advantages.

Jensen's (1986) has delivered free cash flow hypothesis to limit management discretion. He said the

financing available to managers explains free cash flow as the amount of cash all the projects has a

positive net present value. Jensen's concerns with enough revenue should drop the director’s vibration

or adult incontinent less than ideal in business activities. If so Regarded as an issue then it can be

unraveled by then or more benefit or installment of credit. Indeed, even settled a firm can apply to

both arrangements along with the principle of free cash to reduce debtor flows to pay interest and

principal of the firm. Furthermore, the rise Profit managers the ability to chase in vain should benefit

reduced the stockholders Activities.

2.3.2 Signaling theory of Capital Structure

A Signaling theory was introduced by Ross (1977) consistent with Ross Managers are often used as a

sign of the capital structure of the companies to investor. A Ross manager (internal) assumes that the

return address is real distribution firm, but not investors. Decided to include supervisors Debt in the

capital structure, investor’s higher future cash flows and interpreted as a sign of the organizations

promise to his treaty responsibility. It represents the high stage of self-esteem under his leadership, the

public sentiment to think that there are possibilities in the delightful firm Future. if financial manager

of firm want to issue new share of equity, indicating the firm Share unfavorable prospects and

disadvantages to the new investors. Accordingly, He concluded that the broader level of debt as a

symbol of high quality investors.

2.3.3 Trade off theory of Capital Structure

This theory (Scott, 1977) claims that the maximum debt ratio of an organization is find out by a trade-

off Debt (interest payments tax deductibility) the advantages then disadvantages of using (Insolvency

value). High profits of a firm decreases in the estimated cost of the financial the pain and increasing

their tax benefits from increased leverage of the firm. Furthermore an organization with Small

investment will have tangible resources in financial distress costs than a company relies on intangible




resources. The finding of this theory show that the company will give prefer to debt financing rather

than equity financing. Financing the tax benefit is equal to the point at which the possibility of

bankruptcy creditors.

2.3.4 Pecking order theory of Capital Structure

This theory was present by Majluf and Myers (1984).According to them this theory cannot pursue the

leverage of firm which is targeted each firm decide debt and equity ratio base on their financial needs.

Companies retained earnings from the fund projects. The firm issue more equity to shareholders in

case of low retained earning when they need loan for further investment. Because retained earnings

have low cost as compare to issuing new shares. External resources can be used on behalf of very high

cost of financing in the issuance of new shares. Profitable firms on domestic cash and reduce

debt.POT facing difficulty to obtain funds at sensible cost.

2.2 Relationship between Firm Performance and Leverage

According to Kinsman and Newman in 1999 to inveterate the relationship among the capital structure

and firm performance they found some reason which is given as follows, first element is debt variable

in which this level of the firm have boost in the greater extend for a time which is required in

explanation of debt level impact on the performance of the firm. From that reason firms can take OCS

(optimal capital structure) decision in the particular situation. The other reason is that the purpose of

the investor and manager is distinguished for the effects of debt level in the performance of the firm in

the particular circumstances. The last one is the most important reason which show the association

among the debt level and firm performance to measure the relation among the debt level and

stockholder wealth because the main objective for the firm manager is to maximization of the wealth.

Gleason (2000) In the European countries firm performance measured by profit margin and ROA

found a negative and vital relation of leverage level with firm performance. Upneja and Dalbor (2001)

on the capital structure of restaurant business in this respect comparing the older firms with newer

showing that older firms in total funding used long term funds as they have more confirmed inflow of

money, and growing firms with much of opportunities so having high scale of leverage in their capital

structure as compare to lower growth firms use each short term debt finance to finance its operations.

Although for risky businesses it is very difficult to raise debt financing because there is a lot of

chances of bankruptcy so therefore they mostly prefer short term borrowing as compare to long term

financing. There is data imbalance problem in long term debt while short term debt financing can be

obtained from domestic lenders.

Chinese and modern finance theory phases and developed the relevant factors of the particular firm

that is the same, and Chen. (2004) in an analysis of Chinese corporate environment and the evolution

of its properties that is similar. But the trade in the POT established markets offers no explanation for

the choice of optimal capital structure (OCS) by a Chinese company. First, the use of retained

earnings and opt for the long-term debt financing and equity financing these companies seem to have

implemented a new instruction. Deesomsak (2004) Leverage found in the bonding surface with a

negative gross profit margin measured firm performance in their study on Malaysian firms. Internally

generated funds beak profits in favor of the idea, through the Malaysian firms. Moreover, Singapore,

Taiwan and the negative correlation between the performances of the firm's leverage and firms in

Australia but was mediocre. Leverage was a slight concern is backed firms in Singapore and the

positive impact they are less visible to financial distress costs because of the size of the firm for all




countries except Singapore. San and Heng (2011) also invested the relation of capital structure with

firm performance of the Malaysian construction industry considering the financial crises of 2007 - 08

that seriously affected Malaysia and most of the economies of the world. The findings of the study

shows that the financial crises do not have huge impact on the performance of construction industry

because of the high scale developmental work going on in the country. And further they depicted

Weak relation among leverage and performance measured by ROE, ROA and profitability in the

Malaysian construction industry comprising of small, medium and large size companies.

Figure 1: Theoretical Framework

2.3 Hypotheses

For the current research an alternative hypothesis are as under. Which I have been done formulated

out from the literature review.

H1: There is significant and negative relationship among profitability and leverage.

H2: There is positive and significant association between tangibility and leverage.

H3: There is also significant and positive relationship among firm size and leverage.

H4: There is significant and positive association between firm growth and leverage.

3. Methodology

This data collection and data analysis method describes the events was used for this study. Section I,

data collection for the study with a view to reach the objective results, the most appropriate research

methodology needed for presentational and analysts also highlighted. This research method research

Profitability

Tangibility

Firm Size

Firm Growth

ROE

Leverage




design, nature and sources of data and techniques used in the analysis were also outlined will also be

included. It tries to take out the paper on the performance of the firm's capital structure model using

the details with specific variable.

3.1 Data Sources

In this paper the method used in collecting the secondary data was the evaluation of the capital

structure after the yearly report and record of five firm of textile sector which is listed in the Karachi

stock exchange market using arbitrary testing procedures.

3.2 Firm Specific Factor Determinant of Capital Structure

Many type of business they may be small, medium or large needs finance and financial resources for

the business operation to full fill their needs. Capital structures of any firm base on the cost of benefit

analysis of equity or debt. In this paper we explore the effect of specific elements of the Capital

Structure.

3.2.1: Profitability

The pecking order theory is more probable to be funded from inside sources external sources rather

than a profitable firm. More profitable organization reduce the debt because they are able to produce

profits and leverage an inverse relation shows that the project cost for the easy investment funds and

cost effectively insiders to between be expected to hold. Rajan and Zingales (1995) a negative relation

between profitability and leverage is irrelevant in determining the structure of the profit is found in

the capital. On the other hand, is subject to all debt is common for lenders, in considering these

factors, the debt obligations of the payment capacity of most tolerable level of debt the firm after firm

profitability measures. The most profitable firms can easily add additional debt in their Capital

Structure is argued. However the TOT signaling theory and agency cost theory maintain there is a

positive relation among profitability and leverage. After Rajan and Zingales in 1995.AndSupanvanij

(2006), is used as a proxy for the profitability ratio of operating income to total assets

3.2.2 Tangibility

Guarantees against default risk of borrowers on the loan could be considered as collateral to ensure

tangible assets of a firm. Leverage measure of tangible assets and predict the positive relation among

the tradeoff theory Be that as it may, the impact is not yet clear. Incorporates the above experimental

studies affirm the hypothetical forecasts, Lang and friend (1988), I need more benefits to firms with

assets less collateralizable pay a heavy price for the debt to limit the tendency to consume manager,

suggested that it should use debt to oversee management activities. There is a negative association

between tangibility and leverage assets, which means confirm the results of the Sheikh and Wang

(2010).The study measured total assets and net fixed assets as a ratio tangibility following Lang and

friend (1988).

3.2.3 Firm Size

The association among firm size and leverage is unclear. Many large firms’ literature diverse reasons

cause more stable or less unstable cash flows are less often failed also a positive association relating

firm size and leverage with the securities most likely use the economies of scale to continue the offer.

Finally, large firms can issue debt at a lower cost as well as compare to smaller firms. In this case we




suppose the size to be positively associated to leverage. Thus, Raja and Zingales (1995), and empirical

studies by Booth (2001), generate that the leverage is generally positively interrelated with the size of

the company On the other hand. Chung (1993), and Ozkan (2001) by size of firm conducted studies

and exposed no ordered relation between Total debt ratios but since of Fame and Jansen's (1983)

discussion firms under asymmetric information, maybe these firms to make

ready more information to strange investors than smaller Firms. The debt equity increases their

comparative prime concern. In such Ickes and Ivgen (2011), Farooq and Elli (2011) and the results of

some studies exposed a negative relationship among size and leverage. Follow Zingales and Rajan

(1995) is used as a proxy for the natural logarithm of the size of net sales.

3.2.4 Firm Growth

Myers (1977) will need to reduce debt in the capital structure of companies with growth potential that

argument. The opportunity can generate moral hazard effects and push firms to get extra risk. To

reduce this problem, the cause of shareholder assets in increase opportunities should be financed with

debt rather than equity to at least have a reduction / risk. Gued (2003), Sayilgan (2009), Buferna

(2005), and former and Oliver (the results of 2009) which supported the upside in growth and

leverage the firm. On the other hand, Titman &Wessel’s (1988), growth opportunities and found a

positive association between leverage Prefers the idea of a new project with internal funds to finance

the firm's beak. Nevertheless, growing firms often do not have enough internal funds to finance new

projects. Equity financing, debt financing firms as a result of the loans require that prefers. Chen,

J.(2004) and Buferna (2005), then used as a proxy for the growth of the percentage change in the price

of the firm's total assets.

3.3 Dependent and Independent Variables

Firm specific factors or determinants of Capital structure can be classified in to dependent and

independent variables. Leverage used as dependent variables related to debt and equity. Profitability,

tenability, size, growth and return on equity are used as independent variables

3.3.1 Econometric Model

Pooled regression analysis is regressed on dependent variable leverage and explanatory variables

profitability, tangibility, firm size, return on equity and firm growth.

Therefore, equation for regression model is following,

LG = β0+β1 (Prof)+β2(Tang)+β3(FS)+β4(FG)+β5(ROE)+ε

Where,

LG= Leverage

Prof= Profitability

Tang= Tangibility

SZ= Firm Size

Gr= Firm Growth

Roe=Return on equity

http://www.simplish.org/conversion/72A2A13D/#anchor1




4. Result and Analysis

Table 4.1: Descriptive Statistics

The above table 4.1 shows the mean value of each variable standard deviation, maximum value,

minimum and kurtosis. The mean value of leverage is 4.0250. With standard deviation17.31586,

minimum and maximum values -30.80 and 115.89 correspondingly. It means that average firm in

Pakistan textile sector use high In Capital Structure portion of debt. In the above table 1 the mean

value of profitability is 1.5486, with standard deviation is 5.14429, minimum and maximum value is -

7.60 and 16.22. This point out that profitability is in a good position this point show that all the

company is profitable. In the above table the mean value of the tangibility is 0.6538 with standard

deviation 0.1334 minimum and maximum value is 0.38 and .87.In the above table 1 the mean value of

the ROE is -20.0036. With standard deviation 123.22 minimum and maximum values is -847.67 and

46.53.In the above table the mean value of the firm growth is 8.2154 with standard deviation 18.1516

minimum and maximum value is -10.89 and 82.22. So it expresses that some textile firm increase their

sales but some in weak position. In the above table the mean value of the firm size is 13.4943 with

standard deviation 2.1816 minimum and maximum value is .00 and 15.21.

Range Minimum Maximum Mean Std.

Deviation

Variance Kurtosis

Statistic Statistic Statistic Statistic Std. Error Statistic Statistic Statistic Std.

Error

Leverage 146.69 -30.80 115.89 4.0250 2.44883 17.31586 299.839 37.382 .662

Profitability 23.82 -7.60 16.22 1.5486 .72751 5.14429 26.464 .310 .662

Tangibility .49 .38 .87 .6538 .01888 .13348 .018 -.669 .662

Roe 894.20 -847.67 46.53 -20.0036 17.42619 123.22180 15183.61 43.790 .662

Firm growth 93.11 -10.89 82.22 8.2154 2.56703 18.15168 329.483 5.834 .662

Firm size 15.21 .00 15.21 13.4943 .30853 2.18162 4.759 30.745 .662

Valid N

(listwise)




Table 4.2: Coefficientsa

The above table 4.2 show that profitability having negative relation with leverage (-0.201) but it is

statistically significant (.01<p=.05) at. 05% level so our research hypothesis H1 is accepted, so there

is negative and significant relationship between profitability and leverage”. Thus, profitability

depends upon leverage. Tangibility is negatively correlated with leverage (-0.117) but it is not

statistically significant (.15>p) under any three level of significant. 01%, 05% or. 1%. So our research

hypothesis H2 is rejected. Here is positive and significant association among tangibility and leverage.

So our result does not favor the tradeoff theory offered by (Myers, 1977) that debt tends to increase

fixed assets of the firms. Firm size is negative correlated with the leverage (-0.058) and it is not

statistically significant with leverage (.000<p=.01) at 1% significance level. So our research

hypothesis H3 is rejected, “There is negative and not a significant relationship between firm size and

leverage”. Firm growth is positively related with leverage (0.034) and it is also statistically significant

with leverage (.04<p=.05) at 5% significance level. Hence, our research hypothesis is accepted,

“There is positive and significant relationship between firm growth and leverage”. This proves that

the growth of firms is very high in textile sector of Pakistan and they used more debt for financing

new product instead of equity. The only reason is that the firms need more cash flow for growing and

they have to rely on debt because they do not able to meet their financing through internal resources.

Table 4.3: Model Summarya

a. Predictors: (Constant), Firm Size, ROE, Firm Growth,

Profitability, Tangibility

Model Unstandardized

Coefficients

Standardized

Coefficients

B Std.

Error Beta

t Sig.

1

(Constant) 18.348 11.73

8

1.563 .125

profitability -.677 .242 -.201 -2.798 .008

Tangibility -15.172 9.615 -.117 -1.578 .122

Roe -.129 .009 -.916 -14.067 .000

firm growth .033 .062 .034 .527 .601

firm size -.459 .573 -.058 -.801 .427

a. Dependent Variable: leverage

Model 1

R .908a

R-square .825

Adjusted R Square .805

Std. Error of the estimate 7.63936




Table 4.4: ANOVA

Model Regression Residual Total

Sum of Squares 12124.275 2567.831 14692.106

Df 5 44 49

Average Square 2424.855 58.360

F 41.550

Sig. .000b

Table 4.4 shows the result of pooled regression analysis. Adjusted R square is. 805 which mean that

there is 80.5 % variation in leverage (dependent variable). So, it means that the choice of firm specific

Capital Structure is defined by five independent variables particularly more explained by two

variables profitability and firm size.

Table 4.5: Expected and Observed Results

Determinants Proxy/Measure Expected relationship

with Leverage

Observed

Relationship

Profitability Net Income/Total

Assets

negative Positive

Tangibility Net Income/Total

Assets

Positive Negative

Roe Net income/total

Equity

Positive Negative

firm growth Net Income/Total

Assets

Positive Negative

firm size Log of Sales Negative Negative

Table 4.5 Present the result of hypothesis that we have tested. Out of 5 independent variables 2

variables are statistically significant with leverage Tangibility and growth are both negative related

with leverage.

Table 4.6: Correlation Matrix of Independent Variables

Variable Leverage

Profitability

Tranquility

Firm size

Firm

growth

Roe

Leverage 1

Profitability .027 1

Tangibility -.113 -.378**

1

Firm size -.096 .293* -.440

** 1

Firm growth -.029 .202 -.003 .148 1

Roe -.888**

-.212 .106 .039 .016 1

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).




Table 4.6 shows the correlation matrix of variables which explain the presence of multicollinearity

between independent variables. The highest correlation exists between the return on equity and

leverage which is negative 88%. The second highest correlation exists between the tangibility and

leverage which is also negative 11%. The relation among Firm growth and leverage which is 2.9%

which show there is negative and weak relation between the firm growth and leverage. The

relationship among the profitability and leverage is 2.7% which show the positive relation. The

relation between the firm size and leverage is 9.6% which is also show the negative relation among

the firm size and leverage.

5. Conclusion and Recommendations

5.1 Conclusion

This study has observed the effect of firm specific Factors on capital structure decision (leverage) of

Pakistan textile five firms from 2004 to 2014. We found that there characteristic capital structure

profitability firm growth and ROE are statistically significant with leverage in textile sector of

Pakistan. Profitability is positive related with leverage while tangibility, firm size, firm growth and

ROE are negatively related with leverage. The results of this study justify the static trade off theory

which says that firms who have high leverage over equity in financing will have high growth and

profitability i.e. due to high interest on debt tax deductibility decreases. There is positive relationship

between profitability and leverage. This paper investigate that, in textile sector, large firms do more

financing through debt because there financing demand cannot be meet only through equity finance

and as they have more accessibility to this source of finance as in comparison the small firms do not

have much access to such type of finance. The rate of growth of assets is high because all assets are

financed by debt. One of the major reasons is that, more growth of assets needs more cash flow so

firms cannot meet their financing through only internal resources so firms are intended to borrow debt

and finance their assets. Out of four hypotheses, our two hypotheses are accepted. Profitability and

firm growth is having positive and significant relationship with leverage while tangibility, firm size

and ROE is negative related with leverage.

5.2 Suggestions and recommendation for further research

The company financial performance debt to equity ratio shows the impact on the financial

performance of the element or move companies. When considering the research result will be more

valuable if it is different from the kinds of measures. Many sectors are listed in the Karachi Stock

Exchange but have taken a sector research and are composed of a small number of firms. The sample

size will be increased to expand the analysis. Only some technique is used to test hypothesis such as

descriptive statistic correlation and regression. Further the research can add much variety of technique

to generalize their finding. Optional information that are collected for this research to test it out we

can use the secondary information on each organization.

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Khan & Batool 17 ISSN: 2520-0739

Analyzing the Effect of Information Technology SAP (System Application Product)

on Public Sector Organization’s Performance: (A Case Study of Accountant General

Khyber Pakhtunkhwa Office Peshawar)

YASIR KHAN Ph.D Scholar, Qurtuba University Peshawar

[email protected]

DR. SAIMA BATOOL

Qurtuba University Peshawar

[email protected]

Abstract

The advance Accounting software and information system are very vital in public sector. The

globalization demands the change toward new technology. Computerized Accounting software like

SAP really works in minimizing the work burden and brings efficiency in working profile. History

shows that those organizations which focused on their technological improvement proved to be

successful organizations on the planet. The study has focused on Public sector organization where

most of the work was done manually rather than using the advanced computer infrastructure and

information system. The study surveyed 150 employees of the Accountant General Office Khyber

Pakhtunkhwa Peshawar of both junior and senior level. The study used stratified random sampling

technique creating strata’s for both junior and senior level employees. The self-administered15 items

questionnaire was used tested for validity and reliability. The results found that both type of

employees have been benefited from the application and use of computer and information system.

Keywords: SAP Accounting Software, Information technology, information system, infrastructure and

Organization Performance.

1. Introduction

In Pakistan, the system of financial management has been innovated significantly since long. This

has helped the government to manage the financial affairs of the state in efficient manner and to

create an environment which is more favorable from operational point of view for the public sector

entities. The Government of Pakistan has taken initiatives for restructuring of the existing system of

financial reporting and financial management with a view to improve the overall government

accounting system through system application product (SAP R/3).The legacy system of accounting

was not had the capacity to meet the requirements of budgeting however it gave information of

financial statements and performance which was not fully assure able and reliable. In addition, in the

previous framework of the growing national and international integration and requirements of public

sector management reform, the Government of Pakistan accounting system needs to be improved by

conversion towards computerized Accounting system which was only possible by adopting and to

emerging into information technology SAP (salman, 2014). The emergence and advancement in

Information Technology has caused dramatic revolution in all aspect of human endeavor. The

information technology applications and technological elements have changed the demonisms and

dynamics of businesses and organizations. The world shifted human being from industrial age to






computer and information age (Digital age) and world become digital world in which every activities

strictly done over Information Technology and different Information System are interlinking by

communicational network internet and software. Internet and connectivity play the role of live

oxygen though which the whole world is connected. IT applications and strong internetworking

infrastructure has caused sources of opportunities in business and organizations. The technological

advancement and computer modernization has made the transformation of information easy, speedy,

and timely. Information Technology and Information System are based on applications and

internetworking infrastructure that improved the efficiency functionality and flexibility of the

organizations and business. Through Information Technology based strategy have perhaps even

changed the business models of the organizations and has made them much diversified organizations.

Computer applications have become the more indispensible vehicles of the vital development,

improvement and have made the actualization of resources (Debela, 2009).

Information Technology has really affected the performance of blue color workers. Computer

applications have made them more efficient workers than before. Computer technology is very vital

for both public and private organization as it helps in org planning, controlling, directing, budgeting

and reporting (Bhuiyan, 2011).The computerized Accounting applications and conversion of system

form manual to computerization has key contribution and usefulness in the public sector organization

performance. The work flow sharply increases resulting increase in general public welfare which is an

important part of Government responsibilities. These have been witnessed in health, military,

judiciary, business, education and other parts of the society. Computer technology has caused

improvement in service delivery, operation execution, transformation and finishing of the products.

Pakistan is a developing country in transition phases of computer technology and internetworking

infrastructure. Most of the government organizations have adopted the application of computer,

internet and web based information system in their operations and decision making process.

1.1 Problem Statement

Pakistan is a developing country in which most of the organizations process data through legacy

system. Accountant General Office Peshawar is among the public sector organization which has

adopted the SAP application. To know how much the organization has succeeded in covering the

improper and poor means of information and processing. This research investigated the impact of

computerized accounting SAP on the organization Performance.

1.2 Objective of the Study

The main objectives of conducting this research study are the following

To investigate the impact of Computerized Accounting Software SAP, internet and information

system on the performance of Accountant General Office.

To find the contribution of SAP and information system in the organizing, planning, controlling,

co-ordination, budgeting and reporting.

To know the importance of the application, internetworking (internet) and web based information

computerized system as compared to the legacy system (Traditional information system).

To suggest measures on the bases of findings of this research.





The system application product is an advance level of application IT product used for Accounting

Information System. SAP is the fourth largest company in the world providing SAP software for

computerized Accounting. The SAP R/3 system is a business software package designed to integrate

all area of a business. It provides end to end solutions for financials, manufacturing, logistics and

distribution. All business Process are executed in one SAP system and sharing common information

with everyone. Information Technology based strategy bring positive revolution in the performance of

the organization such as business firms ,health care centers, traffic control system in area of critical

operational management and decision making in complex situation for the operational managers and

executive managers. The computerized Accounting enhance employees performance, standardization

of services, strong collaboration various activities, strong and sustainable consumers relationship

from the services and from employee of the organization and real time communication to consumers

and organization achieved their goals effectively in shorter time by investing limited resources and

limited financing. Through the implementation of Information Technology& Information System

based strategic planning the organization become intelligent and due to intelligence the administration

and operation of organization will be effective so the organization become smart and smart

organization achieved the their objectives successfully (Zambrano, 2008).

Different Information Technology techniques like data base management system for data management

of the organization, data warehouse, data mining, cloud computing, virtualization, remote computing,

data grading, mobile computing, crowd sourcing, GSM, GPS, ubiquitous computing techniques and

information system centralized ,distributed and web based information system similarly the modern

infrastructure s and architecture of Information Technology also play an important contribution in

smart organization (Harthony, 2009). Debela (2009) argued that Information Technology automata

have really affected the performance of blue color workers. He further added that Information

Technology applications have made them more efficient workers than before. Computer technology is

very vital for both public and private organization as it helps in organization planning, controlling,

directing, budgeting and reporting. Information Technology implementation and Information System

support and improves the delivery of services at very excellent pedestal due to high processing and

better quality of management and the performance in both private and publics organization definitely

increased the technology based strategy in the organization help in operations like transaction,

controlling the transaction, other offices automation daily customers recording, employees attendance

record, security concerned issue ,budgeting ,reporting and Information Technology& Information

System based strategy also support critical decision which are taken by the organization managers,

operation managers and executive managers of in shorter me with accurate analysis design best

decision making in complex situation ,Information System is the strategic engineering of Information

Technology infrastructure and architecture disciplined to combine people, software technologies,

hardware technologies, telecommunication network technology and data base technologies that accept

data from external environment ,process data, stored the information/data and produces output reports

to external environment for various sort decision maker of the organization.

Fountain (2007) suggest that government organization require to distribute the work of organization

because work distribution bring great revolution in services and management and the administration

will be effective by decomposing /splitting the structure of organization so performance will be

improved .this only possible by implement IT based strategic planning for administration and services

distribution and the cost ,time and resources will be better managed. Zambran (2008) recommend that




IT based strategy planning the services of the organization improved instead of manual information

system in organization .He suggested that Information System is reliable and cost effective and

computerized based system eliminate the problem redundancy of data in the organization, bring

accuracy, sharing of information in the organization and their consumers, reliable backup facilities, up

gradation and maintenance facilities, integration and integrity ,free infrastructure data advisability,

security and privacy so all these are Information Technology based planning through which the

performance of the organization. Aribisala (2008) asserted that Information Technology infrastructure

is absolutely important for better and effectively managing and coordinating the public sector

organizations. In health center the patient monitoring effectively computerized based system is

important and similarly when army deployed in battle filed the proper coordination is necessary for

real time operation so without Information Technology based techniques it obviously difficult in this

age of technology ,similarly industrial processing system the different activities monitoring at real

time is important like product designing industries temperature and cooling condition detection is so

critical important and Information Technology based strategy is necessary for communication in

organization because traditional communication are costly and Information Technology based calling

system are reliable for communication.

Harthony (1990) stated that heterogeneous infrastructure and different architecture are available for

communication of text, audio, video, image ,voice data and now web based system carry strong GPRS

in reliable manners different companies manufactured and designing the communication network

equipment like hub, switch, router, terminal devices like laptop, desktop, mobile devices and wireless

and wire media and speed of internet bring effective communication infrastructure and

communication become chippers and reliable. Olorunsola and Ekong(2006) stressed that e mail is

reliable and cost effective and secure method of data transferred in the organization this also a great

contribution of Information Technology in organization.

Ajayi and Ayodele (2002) stated that Information Technology bring excellent changed in GDP of

country and the economy become emerging economy so puts vital importance in economy

development. According to Bhuiyan (2011) the web based computerized information system the for

business firm assist the business and all the business activities are linked to web so the business

become e business and e business all the activities are strictly done over the web so it also called web

based business all supported activities or subcategories like e marketing commerce, e-banking mailing

shopping purchasing, e trade, e knowledge learning, e-ordering all activities defiantly support

business. If Information Technology based strategic planning are deployed for business today then

business can achieved the objectives in shorter time with limited resources. Information Technology

based business has various benefits for the firm and consumers e-business, customer satisfaction is

high and strong and sustainable relation build with customer, Information Technology based business

will be globalized because internet based marketing worldwide customer are created so customers

purchased ratio to sale will be high and ultimately business firm getting high revenues which is main

goal of every business firm in shorter interval of time, price reduction ,standardization of services,

customers feedback, competitive advantage, 24 hours engagement of customers, and free services and

employee services performance is vision of Information Technology based tactic of business.

2.1 Research Hypotheses:

H0: There is no impact of computer and internet working on the efficiency of AG Office Peshawar.

H1: There is positive impact of computer and internet working system on the efficiency of AG Office

Peshawar.




H0: There is no significant difference between the efficiency of junior and senior level employees due to

computer and information system.

H2: There is significant difference in efficiency of junior and senior level employee due to computer and

information system.

Corporate Governance Factors Earning per Share

Figure 1: Theoritical Framework

3. Methodology

This is a descriptive research. The data of this research was collected from 150 employees of

Accountant General Office Peshawar. These employees were segregated in different strata’s .The

employees were distributed in junior and senior levels. So the stratified random sampling technique

was adopted in this research study. The questionnaire of this research was comprised of 15 items. The

research questionnaires was self-administrated, the questionnaire was validated and cheeked for

reliability. T- test has been applied to conclude the results.

4. Data Analysis

The below tables show the results of the impact of Computer Accounting and information system on

the AG Office Performance. In the below table 1 represent junior level employee and 2 represent

senior level employees. The results suggest that there is no difference in the efficiency of junior level

employees and senior level employees. The levene’s test suggest that the impact of computer and

information system has an impact on the efficiency of the civil secretariat employees and there is no

difference in the efficiency of both junior and senior level employees. As the Levenes, test value is

insignificant at 5% probability. Both employees level showing similar responses to computer and

information system on the employee’s efficiency. So all classes of employees are benefited from the

use of computer application and information system.

SAP

Information System

Infrastructure

Information Technology

Organization Performance




Table 4.1: Groups Statistics

Table 4.2: Independent Samples T-Test

Levene's

Test for

Equality of

Variances

t-test for Equality of Means

F Sig. t df Sig.

(2-tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

Computer

and

information

system

Equal

variances

assumed

2.76 0.1 3.78 189 0 0.102 0.027 0.049 0.155

Equal

variances

not

assumed

3.19 43.35 0.003 0.102 0.032 0.037 0.166

5. Conclusion

The IT (information Technology) and IS(information system) based strategy bring positive

revolution in the performance of the organization such are business firms ,health care centers, battle

field management, traffic control system in area of critical operational management and decision

making in complex situation for the operational managers and executive managers.The IT & IS

strategic planning having greater opportunities such are improved employees performance

,standardization of services, strong collaboration various activities, strong and sustainable consumers

relationship from the services and from employee of the organization and real time communication to

consumers and organization achieved their goals effectively in shorter time by investing limited

resources and limited financing. This research was aimed at knowing the effect of Information

Technology SAP (System Application Product) on Public sector Organization performance. The

research was conducted using self-administered questionnaire analyzing 150 junior and senior level

employees for the purpose. The results revealed that computer and information system has positive

impact on the employees of efficiency in this particular organization employees. The results suggest

that computer has same impact on both level employees.

References Ajayi, I. A. & Ayodele, J. B. (2002). Fundamentals of Educational Management. Ado-Ekiti:Greenline

Publisher.

Argyres, N. S. (1999). The Impact of Information Technology on Communication: Evidence from

the B-2’ Stealth Bamber, Organization Science 10(2), 162-180.

employees N Mean Std. Deviation Std. Error Mean

Computer

and

information

system

1.00 120 3.8319 .13564 .01086

2.00

30

3.7302

.17730

.02997




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in Information and Communication Technology and Computer Applications. Ado-Ekiti;

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Bhuiyan, M. S. H. (2011). Public Sector eService Development in Bangladesh Status Prospects and

Challenges. Electronic Journal of e Government 9(1), 15-29.

Debela, T. (2009). The Role of Information Technology in Enhancing the Administrative Capacity of

the Civil Service USA: Lesson from the USA.

Fountain, J. E. (2007). Better Public Service for Growth and Jebs. National Center for

DigitalGovernment (NCDG), USA. NCDG Occasional paper No 07-007 (Online)

Availablehttp://scholarworksUmassedu/cgi?anticles=1025&context=ncclg 10 March 2010,

Harthony, M. G. (2009). Mini and Macro Computer Systems, London; ELBS // Macmillian

Harderson, J. C & Venkatraman, N. (1994). Strategic Ailonmenti a Model for Organizational

Transformation via Information Technology. In Allen, T.J. and Mortons, S. (Eds). Information

Technology and the Corporation of the 1990. New York: Oxford University Press.

Muhammed, R. B. Abdulkarim, (1995). Improving the Efficiency of the Public sector www://unp

Nerisa, K. & Millicent, O. (2007). Impact of e Government on Management and use Government

Information in Kenya

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Communication. Occupational Communities and Organizational change Organisation service,

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International Journal of Electronic Government Research 4(2) 1-13.

http://scholarworks/



Saeed, Ullah, Qadir & Kham 24 ISSN: 2520-0739

The Effect of Authentic Leadership on Job Outcomes and Organizational Innovation:

The Mediating Role of Psychological Empowerment

IMRAN SAEED

International Islamic University, Islamabad

HIDAYAT ULLAH

IBMS, The University of Agriculture, Peshawar

GHAYYUR QADIR

Lecturer, Abdul Wali Khan University Mardan

[email protected]

SAIF ULLAH KHAN

Institute of Management n Studies, Peshawar

Abstract

This study focuses on authentic leadership practices and their expected outcomes in terms of

creativity, affective commitment and organizational innovation directly and through the mediating

effect of psychological empowerment in telecommunication firms operating in Peshawar, Pakistan.

Convenient sampling technique was used and data was gathered from two hundred (200) managerial

level officers working in these selected organizations. The findings of the study revealed highly

significant effect of authentic leadership on creativity while insignificant effect on affective

commitment and organizational innovation. The study also revealed partial mediation effect by

psychological empowerment on the relationship of authentic leadership with creativity, organizational

innovation and null mediation with affective commitment. This study recommends emphasizing largely

on authentic leadership practices to enhance creativity, commitment of the employees and

organizational innovation. The finding of the study also recommends empowering the potential

employees to boost their outcomes and to bring organization closer towards goal achievement.

Key Words: Authentic leadership, Psychological empowerment, creativity, affective commitment,

organizational innovation.

1. Introduction

In today’s dynamic environment organization needs to have a competitive advantage over competitors

to survive and prosper (Busra et al., 2013). With a dramatic advancement in technologies, domestic

and international competition, leaders have to play a vital role in building commitment of their

employees with organization, fosters creativity and innovativeness process (Muceldili, Turan, & Erdil,

2013).Leaders have to show Authenticity in their behavior, motivate and empower employees to take

active participation in their work to achieve overall organizational goals. Authentic leadership is the

form of leadership characterized by four constructs that is, self-awareness, balanced processing,

Internalized moral perspective and relational transparency (Kernis, 2003; Wulambwa, 2008). In self-

awareness dimension of authentic leadership a leader asses himself that how other people sees

him/her and to what extent he or she influences other people’s attitudes, and where a leader recognizes

his/her strengths and limitations carefully (Kernis, 2003). In balance processing dimension a leader

diagnoses and analyzes relevant available data carefully before taking a decision (Gardner et al.,

2005). Internalized moral perspective refers to the degree where a leader sets highly standardized





ethical and moral values and then guides actions according to those standard values (Wulambwa et al,

2008). The relational transparency is one of the most important construct of authentic leadership

where a leader presents his /her self to their followers, discusses important issues with subordinates,

and provides the opportunity to others to come up with new ideas and opinions. In last two decades

the topic (Authentic leadership and their outcomes) has been attracted attention from both scholars

(Avolio & Gardner, 2005) and practitioners (George, 2003). And according to the findings of the

previous studies, a very rich literature has been developed that authentic leadership positively

enhanced creativity, affective commitment of employees and organizational innovation. Although

authentic leadership and its influence on employees creativity, commitment and organizational

innovation has been examined extensively in western context (Gardner, Avolio, & Wulumbwa, 2005;

Wulumbwa et al, 2008 & 2010), but few studies has been conducted in Eastern context Like Pakistan.

In Pakistan there are number of national and multinational firms operating globally, so a gap exists to

conduct such a research study in Pakistan and see that how authentic leadership effect employees

creativity, organizational innovation and affective commitment directly and through the mediating

role of psychological empowerment. This study contributes to the existing Literature and adds to such

line of research and answers to a call of Rego, Sousa & Marques (2012) for more research on the

topic in different context. Further most of the management literature and theories based on European

experience, this study tests these theories in Pakistani context and may help and prove beneficial for

managers in Pakistan and other businesses as well in the region.

1.1 Objectives of the study

The main focus of this study was to determine the effect of authentic leadership on creativity, affective

commitment and organizational innovation. Further more specific objectives of this particular study

are:

To investigate the relationship of authentic leadership with psychological empowerment,

To find out the mediating effect of psychological empowerment on the relationship between

authentic leadership and creativity, affective commitment and organizational innovation.


2.1 Authentic Leadership

Authentic leadership term was first defined by Luthans and Avolio (2003); and they describe that

authentic leadership is one of the most, basic and genuine style of positive leadership. Authentic

leadership is positive leadership style and more accurately the highest end of leadership (Avolio &

Gardner, 2005). In literature there is no specific view to define authentic leadership. Wulumbwa et al,

(2008), defines that authentic leadership is the behavior pattern exhibits by the leaders that promotes

and establish a positive psychological capacities and a friendly organizational environment, to

enhance and develop constructs of authentic leadership on the part of leaders working with followers

to commit towards self-development (Walumbwa et. al., 2008). Authentic leadership consists of four

dimensions, and these four constructs are, self-awareness, balanced processing, internalized moral

perspective and relational transparency.In self-awareness dimension of authentic leadership a leader

asses himself that how other people sees him/her and to what extent he or she influences other

people’s attitudes, and where a leader recognizes his/her strengths and limitations carefully (Kernis,

2003). In balance processing dimension a leader diagnoses and analyzes relevant available data

carefully before taking a decision (Gardner et al., 2005). Internalized moral perspective refers to the

degree where a leader sets highly standardized ethical and moral values and then guides actions




according to those standard values (Wulambwa et al, 2008). The relational transparency is one of the

most important construct of authentic leadership where a leader presents his / her self to their

followers, discusses important issues with subordinates, and provides the opportunity to others to

come up with new ideas and opinions (Wulambwa et al, 2008).

2.2 Psychological Empowerment

Psychological empowerment is a state or condition in which employees feel and believe that they

have some responsibility and control over his work (Maynard et al., 2007). Psychological

empowerment is described as a type of intrinsic motivation and divided into four cognitions: meaning,

competence, self-determination and impact” (Conger & Conungo, 1988; Thomas & Welthouse, 1990,

Spreitzer, 1995). Meaning refers to the degree to which personal values and beliefs fits to a particular

job demand (Halkman& Oldham, 1980). Competence refers to the abilities needed by someone to be

successful at their work (Bandura, 1989). Self-determination involves autonomy and control by

someone in work initiatives, regulatory and continuance (Deci, Connell & Ryan, 1989). Finally

impact is a state where individuals feel that they can control and influence the outcome of a unit or

organization (Ashforth, 1989).

2.3 Creativity

In the working place employee’s creativity means introducing and producing of important ideas,

solutions to a problem, services and procedures (Amebile, 1988, 1997; Oldham& Comings, 1997).

Problem solving, introducing new methods and techniques, taking benefits, availing opportunities of

businesses and organizational effectiveness are the goals of creativity. According to Zhou & Ren,

(2011) creativity has two core elements, i.e. Novelty and usefulness. Where novelty refers to newness

and usefulness refers to implementation and value. According to Hirst et al, (2011) creative

individuals are more innovative and innovation is the first step in employee’s creativity. The creation

of useful and valuable product, service, idea or a process by an individual working in organization is

known as creativity (Parjanen, 2012).

2.4 Affective Commitment

Organizational commitment is a state of mind or condition that binds the relationship of employees

with their organization and decides to continue membership with that organization (Allen & Meyer,

1996; Meyer et al, 2002). Affective commitment is the first and one of the most important components

of organizational commitment. Affective commitment is defined as a state or condition where an

employee feels that he or she has an emotional attachment, has an identification with, and involved in

that organization. Affective commitment means when employees are emotionally attach toward their

organization, involved in day today activities of organization, show their identification with that

organization (Rhoades, et al, 2001).

2.5 Organizational Innovation

Organizational innovation is the organizational level variable, broader concept than creativity, and has

been defined by scholars in different ways. Innovation is not only defined in the context of new

product and services, but also in the context of new methods, techniques and practices. Organizational

Innovation is the use of technological and market knowledge for developing and producing products

and services for customer to generate profit (Warren & Susman, 2002). Organizational innovation

means adopting and using a new idea or behavior (Jimenez, 2011). Organizational innovation is too




much important in gaining organizational effectiveness, success and dealing in turbulent environment.

Scholars and practitioners argued that innovativeness has been affected by five major factors,

organizational factor, employees’ supervisor relationship, job characteristics, group social factors and

individual characteristics (West & Farr, 1989). Organizational innovation is the process of creating

new combination from existing resources and ideas (Schumpeter, 1934).

2.6 Authentic Leadership and Creativity

Authentic leadership have the characteristics of full range leadership, i.e. positive psychological

capacities, ethical and moral perspectives and these constructs of authentic leadership is positively

related to creativity. Previous literature on organizational creativity shows that to enhance employee’s

creativity, managers and leaders have to show their positive aspects in the work place (Busra et al,

2013).Authentic leaders improve positive emotions of their subordinates by creating supportive

behaviors, moral standards and transparent interactions which ultimately make them more creative

(Peterson et al.., 2012).Previous studies have also found significant relationship of ethical and moral

perspective of authentic leadership with creativity (Valentine, 2011; Bierly, 2009). Walumwa et al,

(2008) explain that, components of authentic leadership (awareness, processes, moral perspective and

transparency) promote creativity. Relational transparency allows employees, subordinates and all

others to come up with new ideas and opinions, and by allowing so employees feels freer to try new

things without fear, and promote creativity (Fraley & Shaver; 2008). (Rego et al, 2012) argues that

leaders with authentic behaviors develop employee’s perception of psychological safety and their

intrinsic motivation that makes them more creative (Rego et al, 2012). Leader member exchange

theory supports positive relationship of authentic leadership and creativity. According to this theory as

we improve the quality of authentic leader behavior, leader member exchange relationship enhances,

that in turn increases the trust and freedom of employees to try something new, new ideas,

controversial opinions without fear (Avolio & Gardner, 2005; Avolio et al, 2004; Brower,

Schoormanb, & Tan, 2000; Scott &Bruce, 1994; Lide, Sparrow, & Wayne, 1997). Thus from the

findings of the previous literature, we propose that.

H1: Authentic leadership is positively related to creativity.

2.7 Authentic leadership and Affective commitment

Authentic leaders motivate and transform their followers through authentic leadership behavior and

positive modeling. Positive modeling includes self-awareness, balance processing, transparency, and

authentic behaviors (Avolio, et al, 2004; Gardner et al, 2005). Shamir & Eilam, (2005) argued that it is

necessary to develop authentic leaders to put followers on a positive way. Researchers have conducted

a lot of studies to investigate other types of leadership such as transformational leadership,

transactional leadership and participative leadership but few studies on authentic leadership

explaining employee commitment to an organization. However Researchers (Shamir & Eilam, 2005)

argues that employee identification with organization increases as there is strong positive correlation

between authentic leadership and affective commitment exists.Relational transparency focuses, allows

people to strengthen their capacity, to enlarge their thinking abilities, to provide a balance, positive

and busy organizational context(Ilies et al., 2005; Avolio &Gardner, 2005; Wulumbwa et al, 2010b)

and such a context provide psychological support to employees, increases trust and crucial for

commitment towards organization (Dale & fox, 2008).On the other hand relational transparency is

one of the crucial elements of authentic leadership and that has its roots in relationship theory, which

has the same domain of affective commitment (Wulumbwa et al, 2010). Relationship theory of

leadership suggest that with positive relationship between leaders and subordinates, followers loyalty,




trust, recognition with, and supports towards organization increases and hence we proposes and

support previous literature that there is strong positive association between authentic leadership and

affective commitment of employees. Hence we propose,

H2: Authentic leadership is positively related to affective commitment.

2.8 Authentic Leadership and Organizational Innovation

Recently there has been great interest in the effects of authentic leadership on employee’

innovativeness. In 1978, (Cummings & O’ Connell) studied that leadership is one of the most valuable

factor in organizational innovation. Empirical studies support positive relationship between leadership

style and innovativeness (Scoot & Bruce, 1994, Jung et al, 2003). Leader member exchange theory

suggests that if there is good and valuable relationship between supervisor and subordinates, it is

considered to be vital for organizational success and key to promote innovative behavior (Graen &

Scandura, 1987). Previous literature shows in organization where a leader establishes high quality

relation, subordinates are allowed to take enough control, possesses decision making authority, power

to express their point of view which are crucial to innovative behavior (Cotgrove & Box, 1970).

Relational transparency is one of the authentic leadership construct in which a leader presents his true

interior, and that is the evident to the employee about leader support for innovativeness (Gardner et al,

2005). Due to the relational transparency construct it is indirectly explains how employees see

innovative culture within a team and company (Gumusluoglu & Elsev, 2009).Follower empowerment

is one of the important characteristic of authentic leaders, and it can be classified as delegated-

participative leadership style (Yammarino et al, 2008) and a great agreement exist that delegated-

participative style fosters creative and innovative performance (Mumford, Scott, Gaddis & Strange,

2002). Authentic leaders provide constructive criticism and by giving positive, fair, developmental

and informative feedback, by doing so creative ideas of members results into innovative behavior

(Zhou & George, 2001).

H3: Authentic leadership is positively related to organizational innovation.

2.9 Psychological Empowerment and Creativity

Scholars have developed a very rich literature regarding psychological empowerment that plays an

important role in predicting performance, productivity, job satisfaction and employee creativity

(Sashkin, 1984). Psychological empowerment relates that how competent employees feel in work

environment. Psychologically empowered employees feel more satisfied with their work, pay greater

attention, show higher organizational commitment, lower intention to quite organization and improve

creativity process. Hence to find out the mediation effect of psychological empowerment, the present

study proposes that positive relationship exist between psychological empowerment and creativity.

H4: Psychological empowerment mediates the relationship of authentic leadership with creativity.

2.10 Psychological Empowerment and Affective Commitment

After studying extended literature, it is concluded that psychological empowerment are closely related

to each other. Psychological empowerment presents the perception and attitudes of people towards

working environment in Robinson perspective (Robinson, et al., 1994). Thus more psychologically

empowered manager would be more committed to the organization. The present study proposes that

psychological empowerment enhances affective commitment in a positive manner. The factors of




psychological empowerment like meaning and self-determination can commit people affectively

(Meyer, et al., 1998). According to (Bandura, 2002) when the goals are seems to be attainable,

employees raise their psychological attachment to mission and will leads to employee’s affective

commitment. An Indian scholar (Sumijha) also linked the relationship of psychological empowerment

with affective commitment through Hackman & Oldham (1976)job characteristic theory. If employees

perform work within an organization, possessing certain work related characteristics like skill variety,

task identity, task significance, autonomy and feedback, and ultimately employees exhibits three

different psychological stats; Meaningfulness of activities, responsibility of work, and knowledge of

results. Previous literature shows that these three psychological stats show positive relationship of

empowerment with organizational commitment (Eisenberger, et al, 1990; Hackman & Oldham, 1976).

H5: Psychological empowerment mediates the relationship of authentic leadership with affective

commitment.

2.11 Psychological empowerment and Organizational innovation

Researchers have studied for years to investigate which leadership style is appropriate for supporting

organizational innovation. Some authors argue that participative, supportive leadership is necessary to

encourage innovativeness (Caker, 2006; Caker & Eturk, 2010) while others describes transformational

leadership is the ideal one (Howeel & sHiggins, 1990). Participative leadership style results in

psychological empowerment that would lead to increase organizational innovation (Lawler, 1990).

Jung, Chu & Wu, (2003) also examine that empowerment is positively related to organizational

innovation. Psychologically empowered individuals feel that they have control over their work,

autonomy, self-effective in performing their work, and these empowering characteristics will put

people to be more innovative at organizational level (Amabile & Grykiewicz, 1989; Spreitzer, 1995).

H6: Psychological empowerment mediates the relationship of authentic leadership and organizational

innovation.

3. Research Methodology

3.1 Population and Sampling

Population is the total number of peoples, things or event of interests that a researcher wants or desire

to study (Sekaran, 2000).The population for this particular study includes managerial level

employees/officers working in Telecommunication firms (Ptcl, Mobilink, Telenor, Zong, Ufone and

Warid) operating in Peshawar. The number of managerial level officers working in Peshawar region

offices of telecommunication firms is 750. The sample size for this study was two hundred (200)

respondents from telecommunication firms operating in Peshawar. The decision of choosing the

sample size is based on the sampling standard provided by Sekaran (2003). As per that standard, for a

total population of 750 the number of respondents in the sample size should be at least 186.The

information was collected from managerial ranked employees/officers. Moreover, sample size was

drawn using convenient sampling technique, which is one of the most commonly used sampling

technique in contemporary management research. To test the proposed hypotheses empirically,

quantitative research method was used and data were gathered through actual visits to the selected

organizations (telecommunication firms) in Peshawar and face to face distribution of questionnaires to

two hundred and fifty (250) respondents. The respondents returned two hundred (200) copies of

questionnaire which is total response rate.




Figure 1: Conceptual Framework

This study includes Five Variables i.e. Authentic Leadership, creativity, affective commitment,

organizational innovation and psychological empowerment. The Variables was measured with adopted

scales. All items was measured on a five (5) point Likert scale which starts from strongly disagree to

strongly agree. The questionnaire containing 43 items was the main instrument for data collection.

The questions was clearly stated, simplified and structured to avoid any ambiguity and other technical

errors. Authentic leadership was measured with 16 item scale developed by Avolio, Gardner &

Wulumbwa, Psychological empowerment was measured with 12 items scale developed by Sprietzer

(1995). All items of Psychological empowerment was measured on 5 point Likert scale starts from

strongly Disagree to strongly agree. Creativity was measured with 6 item scale developed by Kumar

and Holman (1997). All items of creativity were measured on a 5 point Likert scale, starts from

strongly disagrees to strongly agree. Affective commitment was measured with 6 item scale developed

by Meyer & Allen (1991). All Items of affective commitment was measured with 5 point Likert scale

which start from strongly disagree to strongly agree. Organizational innovation was measured with 6

items scale developed by Hult et al, (2004). All items were measured with 5 point likert scale starts

from strongly disagree to strongly agree.

4. Results and Analysis

Respondents are divided on the bases of gender, age, qualification, experience and income of each

respondent taken as a sample size. Where 84.5% respondents with total numbers of 169 were male

and 15.5% respondents with total number of 31employees were female in the sample size of 200

employees.

Authentic

Leadership

Psychological

Empowerment

Creativity

Affective

Commitment

Organizational

Innovation




Table 4.1: Demographic Statistics

Gender

Male N %

Female N %

169 84.5 31 15.5

Age N % Qualification N %

21-30 54 27 BA/BSC 59 29.5

31-40 95 47.5 MA/MSC 130 65

41-50 42 21 MS/PhD 11 5.5

51& Above 9 4.5

Experience N % Income N %

1-10 112 56 25 & below 42 21

11-20 67 33.5 26-35 49 24.5

21-30 16 8 36-50 57 28.5

31 & above 5 2.5 51 & above 52 26

The employees between the ages of 31 and 40 maximally participated in the study 47.5 % followed by

21 to 30 which were 27 %. The employees between 41 and 50 were 21 % and above 50 were least

participants which were 4.5 % of the total sample size. The second demographic represents that

maximum of the respondents65 %, in number 130 have done their MA/MSC degrees followed by

secondly 29.5 %, in number 59 was graduate and least 5.5 % which was 11 in numbers have done MS

and PhDs.The third demographic shows that lower level managers participate highly 38.2 % and in

numbers 71 followed by middle level managers 35.5 % and 66 numbers. Top level managers lastly

participated 26.3 % and which was 49 in numbers. The fourth demographic variable experience shows

that most of the employees having experience between 1 and 10 years participated largely. They

participated 56 % and 112 in numbers followed by employees whose experience was between 11 and

20, and they participated 33.5%& and 67 in numbers. While 8 % employees participated having

experience between 21 and 30 years and their number was 16 out of 186. The employees whose

experience was above 30 years participated 2.5 % and they were 5 in numbers. Demographic income,

of the respondent’s shows that employees earning between 36 thousand and 50 thousand participated

highly 28.5 % and 57 in numbers followed by 26 % employees earning above 50 thousand

participated. Employees with income between 26 and 35 thousand participated 24.5 % followed by

employees with income lower than 26 thousands 21 % participated in the study.




4.1 Reliability Analysis

Table 4.2: Variables Reliability Measurement

Variable No of items Cronbach’s Reliability

Alpha

Authentic Leadership 16 0.71 Reliable

Psychological Empowerment 12 0.73 Reliable

Employees Creativity 6 0.75 Reliable

Affective Commitment 6 0.83 Reliable

Organizational innovation 3 0.68 Reliable

The above table measures variables reliability and the value of alpha reliability shows that data

collected for each variable is reliable or not. If the value for each variable is closed to one or greater

than 70% it means data collected is reliable (Cronbach, 1951).For the sixteen item of authentic

leadership scale the value of alpha reliability is 0.71 which is greater than 0.70 and a sign of

reliability.For 12 items scale of psychological empowerment the value of alpha reliability is 0.73

which is considered is reliable as these items are highly inter-consistent. For 6 items scale of creativity

the value of alpha is 0.75 suggesting that items on the scale are highly inter-consistent. For six items

scale of affective commitment the alpha reliability value is 0.83 which is highly reliable. Similarly for

3 items scale of organizational innovation the alpha reliability value is 0.68 which is closed to 0.70

and seems to be reliable. Thus from the results generated by reliability test it is concluded that the data

collected is reliable and there is no issue regarding reliability.

4.2 Correlation

Correlation shows the degree of linear relationship between two variables. The range of Pearson

Correlation is +1 to -1.The mean value of gender is above 1 with standard deviation of 0.362 showing

that we have on average males as the majority of our sample size. The mean value of age is 2.03 with

standard deviation of 0.813 which means majority of respondents have age between 31 to 40 years.

The mean value of qualification is 2.76 which are closed to three with SD of 0.542 which means that

majority of respondents are MA/MSC qualified. Similarly the mean value of Designation is 1.90 with

standard deviation of 0.799 which means that middle level managers are participated highly. The

mean value of experience is 1.57 with standard deviation of 0.744 which means that respondents

having experience between 1-10 years maximally participated. The main variable authentic leadership

has a strong positive and significant correlation with Psychological empowerment (r =.199**),

creativity (r =.313**), but insignificant correlation with affective commitment and organizational

innovation.




Table4. 3: Mean, Standard Deviation and Correlation

The table shows strong positive and significance correlation between psychological empowerment

and creativity (r =.394**) affective commitment (r =.385**), organizational innovation (r =.219**).

Creativity has a strong positive correlation with affective commitment (r =.293**) and affective

commitment has a positive correlation with organizational innovation.

Table 4.4: Direct Relationship between independent and dependent variables

Mediation Analyses: Step -1

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig. B Std. Error Beta

1 (Constant) 2.485 .319 7.783 .000

Authentic leadership .388 .084 .313 4.637 .000

Dependent: Creativity: F = 21.49, R2 = 0.09, P = 0.000

1 (Constant) 3.129 .334 9.363 .000

Authentic leadership .008 .088 .006 .091 .928

Dependent: Affective commitment: F = .008, R2 = .000, P = .928

1 (Constant) 3.223 .422 7.632 .000


Dependent: Organizational innovation: F = 1.5, R2 = .008, P = .222

4.3 Authentic Leadership and Employees creativity

The F value is 21.49, with a 0.000 level of significance, indicates that overall model fitness. R2

value

is 0.09 and it means that 0.09 percent of changes are explained by independent variable authentic

leadership in the dependent variable creativity. While the rest of variations are due to other factors

which are not included in the study. The value of R2 is positive but very low so it means that we have

only considered one independent variable and many other factors causes’ variations in the dependent

variable employee creativity. The value of regression coefficient is 0.38 and it means that with one

percent increase there will be an increase of 0.38 percent in creativity. The significance level of

authentic leadership is 0.000, and p value is less than 0.05 therefore we reject the null hypotheses and

Descriptive Correlation Analyses

Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11

1.Gender 1.15 0.36

2.Age 2.03 0.81 -.272**

3.Qualificatin 2.76 0.54 .318** -.166*

4.Designation 1.9 0.8 -0.001 .313** .550**

5.Experience 1.57 0.74 -.272** .790** -231** .192**

6.Income 2.59 1.09 -0.006 .376** .532** .890** .254**

7.MeanAl 3.78 0.42 -0.035 .155* .151* .287** 0.082 .281**

8.MeanPSE 3.4 0.39 -0.011 0.113 0.062 .245** .182* .168* .199**

9.MeanCRT 3.95 0.52 0.014 0.025 .209** .287** 0.007 .253** .313** .394**

10.MeanAFC 3.09 0.52 -0.073 0.023 -0.056 -0.002 .145* -0.02 -0.01 .385** 0.097

11.MeanINV 3.73 0.65 0.011 -0.08 0.004 0.016 -0.12 -0.06 0.087 .219** .293** .182*

Note: .* p< .05., **p<.01




conclude that authentic leadership has a significant relationship with creativity.

4.4 Authentic leadership and affective commitment

The F value is very low 0.008 with P value of 0.928, which is not less than 0.05, indicates that overall

model is not significantly fit. The R2 value is 0.000 which doesn’t explain any changes in the response

variable. The P value in above table is 0.928 which is not less than 0.05, P > 0.05; therefore we accept

the null hypotheses that there is insignificant relationship of authentic leadership with affective

commitment.

4.5 Authentic leadership and Organizational innovation

The overall model is not significant for the relationship of authentic leadership with organizational

innovation as the F value is very low 1.50 with P value of 0.222. Although R2

explains a very little

changes but still the model is not significant. The value of regression coefficient is 0.136 and it means

that when authentic leadership value increases by one percent, it will bring 0.136 percent increase in

organizational innovation as well. The P value is 0.222 which is greater than 0.05, so we accept null

hypotheses and conclude that there is insignificant relationship between authentic leadership and org-

innovation.

Table 4.5: Relationship between independent and mediator variable

Mediation Analyses: Step-2

Model

Unstandardized

Coefficients

Standardized

Coefficients


1 (Constant) 2.693 .249 10.820 .000


Dependent: Psychological empowerment: F = 8.173, R2 = .04, P = .005

The F value is 8.173 with P value of 0.005 which is significant and shows overall model fitness. The

value of R2 is 0.04 which means that 0.04 percent of variations in psychological empowerment are

explained by authentic leadership. The value of regression coefficient is .187; it means that if the

value of authentic leadership increases by one percent it will bring .187 percent changes in

psychological empowerment. The P value shows significance level and here the P value is 0.005

which shows significant relationship between authentic leadership and psychological empowerment.

Table 4.6: Relationship between mediator and dependent variables


Model

Unstandardized

Coefficients

Standardized

Coefficients


1 (Constant) 2.184 .296 7.381 .000

Empowerment .521 .086 .394 6.027 .000

Dependent: Creativity: F = 36.33, R2 = .15, P = .000

1 (Constant) 1.374 .295 4.654 .000

Empowerment .507 .086 .385 5.878 .000

Dependent: Affective commitment: F = 34.54, R2 = .14, P = .000




1 (Constant) 2.492 .396 6.292 .000

Empowerment .366 .116 .219 3.164 .002

Dependent: Organizational innovation: F = 10.01, R2 = .04, P = .002

4.6 Psychological Empowerment and Employee Creativity

The F value is 36.33 with P value of 0.000 which shows that overall model is significant. The value of

R2 is 0.15 and its means that 0.15 percent of variations are explained in creativity by independent

variable which is psychological empowerment. The B value is 0.52 which is significant and if we

increase the value of psychological empowerment by 1 it will bring 0.52 changes in creativity. The P

value is less than 0.05and support hypotheses for positive relationship.

4.7 Psychological empowerment and Affective commitment

The F is 34.54 with 0.000 percent of significance level which means the overall models statistically

significant. The value of R2 is 0.14 which means that psychological empowerment has explained 0.14

percent variations in affective commitment, while the rest of 86 percent of variations are due to other

factors that are not included in the study. The p value is less than 0.05, P< 0.05 suggesting that there is

significant relationship of psychological empowerment with affective commitment. The value of

regression coefficient is 0.50 which is significant and show positive relationship between these two

variables and a change of 1 percent increase in independent variable will bring a change of 0.50

percent increase in dependent variable.

4.8 Psychological empowerment and organizational innovation

The F value is 10.01 with p value of 0.002 which is significant and show overall model fitness. The

value of R2 is 0.04 which indicate little variation are explained in X by Y, and this value means that

only 0.04 percent of variations in org-innovation are explained by psychological empowerment. The

value of regression coefficient is 0.36 which reveals positive relationship and when we increase the

value of psychological empowerment by 1 it will bring an increase of 0.36 in org- innovation. The

significant level P value is 0.002 which is less than 0.05, P<0.05 suggesting significant relationship

between psychological empowerment and innovation. We reject null hypotheses and conclude that

there is significant relationship between psychological empowerment and org-innovation.

Table 4.7: Independent-dependent relationship with the inclusion of mediator


Model

Unstandardized

Coefficients

Standardized

Coefficients

T Sig. B Std. Error Beta

1 (Constant) 2.184 .296 7.381 .000

Empowerment .521 .086 .394 6.027 .000

2 (Constant) 1.255 .377 3.326 .001

Empowerment .457 .085 .345 5.349 .000


Dependent: Creativity

The above mention table represents the result of the analyses between independent variable (authentic

leadership) and dependent variable (Creativity) with the inclusion of mediator variable (psychological

empowerment). The results show that Beta value for psychological empowerment reduced in




mediation analyses from (.521 to .303) which demonstrates that there is partial mediation effect of

psychological empowerment on the relationship of authentic leadership and creativity. The possible

explanation for this partial mediation may be that there is other possible mediator and moderator

variable that is influencing on this relationship.

Table 4.8: Independent-dependent relationship with the inclusion of mediator

Model

Unstandardized

Coefficients

Standardized

Coefficients


1 (Constant) 1.374 .295 4.654 .000

Empowerment .507 .086 .385 5.878 .000

2 (Constant) 1.702 .388 4.383 .000

Empowerment .530 .088 .403 6.028 .000


Dependent: Affective commitment

The above table shows the results of mediation analyses between Independent variable (authentic

leadership) and Dependent variable (Affective commitment) with the inclusion of mediator variable

(Psychological empowerment). The results suggest that there is no mediation exists, indicates that

psychological empowerment dose not mediates the relationship between authentic leadership and

affective commitment.

Table 9: Independent-dependent relationship with the inclusion of mediator

Model

Unstandardized

Coefficients

Standardized

Coefficients


1 (Constant) 2.492 .396 6.292 .000

Empowerment .366 .116 .219 3.164 .002

2 (Constant) 2.277 .522 4.358 .000

Empowerment .351 .118 .210 2.970 .003

Authentic leadership .070 .111 .045 .632 .528

Dependent: Organizational innovation

The above table presents the mediation effect of psychological empowerment in the relationship

between authentic leadership and organizational innovation. The result shows that there is partial

mediation effect on the relationship between authentic leadership and organizational innovation due to

the mediator variable (psychological empowerment). The Beta value of authentic leadership is

reduced from (.366 to .070) which means full mediation exists. The possible explanation for this

partial mediation may be that there is other possible mediator and moderator variable that is

influencing on this relationship.

5.1 Discussions

To examine the effect of authentic leadership and its relationship with creativity, affective

commitment and organizational innovation and to explore the mediating effect of psychological




empowerment on this relationship was the main purpose of this study. The study was carried out by

using convenient sampling technique and data was gathered from managerial level officers working in

telecommunication sector operating in Peshawar. The data was tested and analyzed to find out the

mean, standard deviation, frequencies, demographics, reliability, and regression analyses. As there is a

mediator variable included in the study, so (Baron & Kenny, 1986) proposed four step model was

followed and hypotheses was tested. This research supports previous studies that there is positive

relationship between authentic leadership and creativity. Authentic leaders promote psychological

capital of employees which ultimately enhances employee’s creativity (Avolio, Gardner, Walumbwa,

2004, Yammarino et al, 2008). Employees who have a higher psychological capital are more creative

(Avolio, et al, 2004). The study provides support to previous literature that authentic leadership

through balance processing and self-awareness dimensions has a positive effect on creativity (Rego et

al., 2012). The study reveals insignificant relationship of authentic leadership with affective

commitment and organizational innovation. The reason for this insignificant relationship could be the

social desirability issue with the respondents of this study. Social desirability is a social science term

that describes the tendency of respondents to answer in a particular way that will be viewed favorably

by others. The cultural relativity of management could be the one of the reason for the insignificant

relationship. It is not necessary to obtain same results in different cultures while conducting a research

study (Hofsted, 1994).

The relationship between authentic leadership and two components of organizational commitment

was insignificant; in study done by Artem kliuchnikov (2011).The study also found that psychological

empowerment partially mediates the relationship of authentic leadership with creativity, and

organizational innovation. The value of Cronbach Alpha was found reliable as approaching to .70.If

the value for each variable is closed to one or greater than 70% it means data collected is reliable

(Cronbach, 1951). This study aims that authentic leadership has a strong and significant correlation

with employee’s creativity but insignificant correlation with affective commitment and organizational

innovation. Psychological empowerment has also a strong positive and significant correlation with

creativity, affective commitment and organizational innovation. Creativity and affective also have a

strong correlation with organizational innovation.

According to the findings of this study authentic leadership is strongly related to employee’s creativity

as there is strong significant relationship between authentic leadership and employee’s creativity.

Authentic leadership has positive but insignificant relationship with affective commitment and

organizational innovation. Authentic leadership has a significant relationship with the psychological

empowerment in this study. Both partial and null mediation is found and mediator variable

(psychological empowerment) significantly mediates the relationship of authentic leadership with

creativity and organizational innovation but does not mediate the relationship between authentic

leadership and affective commitment. All items of questionnaire are reliable as the value of alpha

reliability is above 70 percent.

5.2 Future Directions

This research study provides and identifies strong research gap for future studies. This study followed

convenient sampling technique, so other sampling method can be used in future research studies to

obtain the results. Simple random sampling and purposive judgmental sampling technique can be used

in further studies. Future studies can also focus to relate authentic leadership with other psychological

behavior like job satisfaction, employee’s performance, turnover intention, and organization

citizenship behavior. Psychological empowerment is included as a mediator variable in this research




study, future studies may include other mediator and moderator variables like psychological capital,

trust and motivation to draw conclusion based on their findings. As cultures varies, different cultures

exhibit different values (Hohsted, 1991), and it is not necessary to obtain the same results in different

cultures by testing the same model. So futures studies can test the same model in different cultures

that may help in strengthening theory development cross culturally. This study included those

employees; working in telecom sector operating in Peshawar, so future studies may include

employees working in other organizations and may test the model to obtain the results.

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Nabeel, Hayat & Ali 41 ISSN: 2520-0739

National Holiday Anomaly in Pakistani Stock market: Evidence from Karachi Stock

Exchange KSE 100 Index

MUHAMMAD NABEEL

Abdul Wali Khan University, Mardan

[email protected]

QAZI SIKANDAR HAYAT Lecturer, Abdul Wali Khan University, Mardan

[email protected]

MUHAMMAD DAUD ALI

Lecturer, University of Haripur, Haripur

[email protected]

Abstract

The study examined National Holiday Anomaly in Pakistani Stock Market. Specifically KSE 100 index

data has been used by this study. The data of ten years (2004-2013) has been considered in order to

check holiday anomaly. T-Test is used to check the presence of holiday anomaly. The study

investigated holiday anomaly for each individual national holiday, each individual year and whole

data sample. The results of all the three cases are insignificant suggesting the absence of National

Holiday Anomaly in Pakistani Stock Market. The absence of such anomaly may be due to the nature

of these holidays. As these holidays are not surrounded by any such activity which can affect the

decision process of investors. Therefore based on the evidence provided by this examination the study

can say that National Holiday Anomaly does not exist in Pakistani factors which need to be

considered in order to understand Pakistani Stock Market in detail.

Keywords: National Holiday Anomaly, Efficient Market, Pakistani Stock Market, T-Test.

1. Introduction

One of the most important components of financial system of the capitalistic world is Stock markets.

Financial assets such as stocks and bonds of joint stock companies, unit trusts, guilt age securities and

other financial products are traded in Stock markets efficiently, systematically and by protecting

investor’s interests.Stock market acts as a bridge and enables institutions as well as individuals to

contribute in country’s wealth through their participation in the secondary market of the country. A

well-regulated stock market decreases transactional costs and encourages fair pricing of securities.

The stock market increases economic activity and increases economic growth as well. It is also a very

good source of increasing employment in the country. The good performance of stock market is an

indication of healthy economy. Due to the above mentioned reasons, stock traders keenly observe a

slight movement in stock index which can influence their future profitability or assist them in

evaluating their portfolios. The stock traders also observe the economy with great interest, in order to

stay inform from any sudden change or incident that may affect their decisions of purchasing and

selling stocks. The Efficient Market Hypothesis (EMH) presented by Fama (1970) suggests that stock







markets work efficiently and that no one can earn abnormal returns. However certain studies have

shown that there are inconsistent patterns in stock market which are commonly known as Calendar

anomalies or Seasonality. Calendar anomaly or Seasonality is among one of the most puzzling topic in

finance which has gained attention of the researchers during the last three decades. Many researchers

have conducted research on calendar anomalies. Some of the famous Calendar anomalies include

Day-of the-Week effect, Month-of-the-Year effect, Weekly effect, Weekend effect, Ramadan effect,

Pre-Holiday effect, Post-Holiday effect and January effect etc. Among these anomalies one is the

National Holiday anomaly. National Holiday anomaly refers to the phenomenon that mean stock

returns are either high or low on the preceding day as well as high or low on following day of a

holiday as compared to normal trading days. The holiday is a day which has at least one preceding

day as trading day and one following day as trading day. The phenomenon of pre-holiday and post-

holiday anomaly is against the weak form of efficient market hypothesis presented by Fama (1970)

which postulates that; all relevant information available to the market participants should not allow

them to earn abnormal returns.

Specifically, weak form of Efficient Market Hypothesis suggests that stock returns and stock prices

should be distributed normally. In contrast, the evidence collected from studies shows that stock

returns are not constant and suggests the presence of seasonal or calendar anomalies. The holiday

effect is the abnormal returns around public holidays and this effect has been found in US and other

developed and emerging markets. There is little research on the national holiday effect in Pakistan

Stock Market and an important question is that how efficient Pakistani market is. In this study, the

daily index data of KSE-100 index is used to analyze the existence and of holiday effect over time.

The data is from 2004-2013 which includes 10 years daily data.

1.1 Research Objectives

To investigate the presence of National Holiday Anomaly in Pakistani Stock Market


Is there any National Holiday Anomaly present in Pakistani Stock Market?


The holiday effect refers to the behavior of investors before and after the holidays. Holiday can be

defined as the day on which trading was supposed to take place but it did not. The definition of

holiday does not only include weekend holidays but also all public holidays are included in it. It is a

general observation that investors react very positively and they participate highly in trading before

public holidays. That is why pre-holiday returns are usually higher as compared to post-holiday

returns. The post-holiday returns are lower because investors are psychologically depressed or not

very interested in taking part in trading activity. The existence of pre-holiday effect was found in

seventeen markets for 65% of sample by (Agrawal & Tandon, 1994). Vergin and McGinnis (1999)

studied the holiday effect for eight holidays on which stock exchange remained close. The holidays

included Labor day (first Monday of May), President’s day (third Monday of February), Easter,

Independence day (4th July), Thanksgiving day (fourth Thursday in November), Memorial day (last

Monday of May), Christmas and new year’s day. They took the data of 10 years (1987-1996) for

finding the holiday effect. Vergin and McGinnis (1999) also examined holiday anomaly for both small

and large corporations. They analyzed S&P 500 and NYSE as proxy for small corporations and for

large corporations they took NASDAQ and AMEX composite indices as their proxy. Their findings




revealed that holiday effect is persistent in small corporations whereas in large corporations the

holiday anomaly has disappeared. Furthermore they found that rate of return is not different for pre-

holidays and normal days for S&P and NYSE however for NASDAQ and AMEX the values were

significantly high. The researchers also found that for all indices before 1987 pre-holiday returns were

much higher which show that holiday effect is vanishing with the passage of time. McGuinness

(2005) studied Hang Seng Index of Hong Kong Stock Market for Chinese New Year holiday anomaly.

The data was divided into two sample periods. First period was between 1995 and 2005 while the

second period was between 1975 and 1995. Their results showed that stock returns show a rising trend

prior to Chinese New Year holidays. Also the researchers suggested that this holiday anomaly is more

stable as compared to other anomalies like day-of-the-week, month-of-the-year etc. Lakonishok and

Smidt (1988) also studied holiday effect. They found holiday effect for eight public holidays which

include Presidents’ Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, New Year

Day, Christmas and Good Friday. Their findings strongly revealed the existence of holiday effect.

They found that pre-holiday returns were approximately two to five times higher than returns before a

weekend and twenty two times higher than normal days return. According to them pre-holiday returns

were 63.9% positive. Ariel (1990) tested holiday effect for twenty years over the period of 1963 to

1982. The researcher examined holiday effect for eight holidays that is Presidents’ Day, Thanksgiving

Day, Labor Day, Independence Day, Memorial Day, Good Friday, Christmas and New Year’s Day. He

found that pre-holiday mean returns are on average nine to fourteen times higher than normal days

mean returns. Ariel (1990) also checked pre-holidays stock returns at hourly basis. The result showed

the same pattern of elevated returns over the day.

Marret and Worthington (2007) investigated holiday effect for Australian Stock Market. They used the

daily stock returns at market as well as industry level. The data from September 1996 to November

2006 was also considered for small capitalization stocks. They also took eight public holidays for their

investigation. The public holidays were Australia Day (26th January), Queen’s Birthday, Christmas

Day, Easter Friday and Easter Monday, ANZAC Day and Boxing Day. Their findings show that

holiday effect is present all over the market and especially for small capitalization stocks. Cadsby and

Ratner (1992) examined holiday effect in Australia, Canada, Japan and Hong Kong. They considered

all local holidays, US holidays and joint holidays. The market indices data of each country was used

for the period of 1962 to 1989. Their analysis revealed the presence of pre-holiday effect in all

countries with highest return on the day prior to the holiday. The researchers also studied pre-holiday

effect for European market but they didn’t found any evidence in favor of pre-holiday effect in

European Stock Markets. Cadsby and Ratner (1992) also studied Hong Kong stock market for Hang

Seng Index for Chinese New Year holiday anomaly. The data contained data for the period of 1980 to

1989. The results strongly showed the presence of pre-holiday effect in Hong Kong Stock Market.

Chong et al (2005) investigated pre-holiday effect for last three decades of twentieth century across

three important markets of the world i.e. U.S, U.K and Hong Kong. Data Stream was used for

extracting the data on daily stock index returns. U.S was represented by S&P 500 index and FT 30

was used for the representation of U.K market. Hong Kong market was represented by Hang Seng

index. The researchers studied the data from 1973 to 2003.The sample period for each of the three

markets was divided into two categories. One category was the trading days before specific holiday

(when stock market remained close) and the 2nd

category was the trading days for the rest of the year.

A t-statistic was calculated for differences in the average of returns. Also a descriptive statistics were

calculated for all the three indices. The results showed the existence of pre-holiday effect in all three

indices for which study was conducted. The effect was most significant in U.K and Hong Kong

indices. Chong et al (2005) found that average return was more, specifically on the days before a




certain holiday than the average returns on non-pre-holidays. Further investigation was performed in

order to check the persistence of holiday anomaly over the years for these three markets. The

declining pattern was not found in U.K and Hong Kong markets; however a declining pre-holiday

effect was witnessed in U.S market particularly in 1990s. Al-Loughani (2005) tested Kuwait Stock

Exchange (KSE) for the presence and causes of holiday effect on stock returns. The data used for

daily stock index was obtained from Global Investment House. The study was performed for the years

1984-2000. The government announced holidays were taken as holidays which involved the closing

of stock market. Al-Loughani (2005) divided the data into two sub periods which included the pre-

invasion period from 1984-1990 and the post liberation period from 1993-2000. A comparison was

made between returns during the trading days right before specific holiday and the rest of the trading

days of year. The results for analysis were obtained by conducting T-statistics, Mann-Whitney test and

Kruskal Wallis test.Al-Loughani (2005) observed no noticeable difference between the two sub-

periods, which shows the absence of holiday effect in Kuwait Stock Exchange (KSE).In order to

determine the presence of any particular pattern surrounding the holidays, further analysis was done

using Kruskal Wallis test. The results showed that post-holiday returns were higher as compared to

pre-holidays or other trading of the year. The explanation provided by researcher for this reason was

that before holiday investors engage in selling and right after the holidays they again develop their

investment portfolios.

Cao et al (2009) investigated New Zealand’s market for the presence of pre-holiday effect. Holidays

were taken as those days on which stock market remained close and trading did not take place. Cao et

al (2009) developed different hypothesis for testing and dissecting pre-holiday anomaly. For the

existence of this effect pre-holiday average returns were compared to average returns on all other

trading days of the year. Separate evaluation of each holiday was also performed in order to check out

that which holiday produced the highest returns on the day before it. Different time periods were also

examined to check out the consistency of anomaly in order to find out that in which period the

anomaly had greater impact. It was also investigated that whether the size of firm plays an important

role in pre-holiday effect or not. Lastly, impact of international pre-holiday anomaly on stock returns

of New Zealand was also analyzed. The difference in mean returns on pre-holiday and other non-pre-

holidays was analyzed for all the firms listed on NZSE 40 and NZSE 50 indices. The data was

analyzed from 1967 to 2006 which includes almost 40 years data. All firms on NZSE 10, NZX mid

cap and NZX small cap indices were taken into consideration to test the relationship between pre-

holiday effect and firm size.

In order to check out the effect of international pre-holiday effect on New Zealand’s pre-holiday

returns, the data from 1967 to 2003 was taken for S&P 500 index. Bid and ask prices of twenty large

and twenty small NZ stocks were used to check the consistency of pre-holiday effect. The results

showed that the average returns on all other trading days were lower than average returns on pre-

holidays. It was also noticed that the ratio of positive returns for all other trading days was lower than

the positive returns on pre-holiday days, which rejected the first hypothesis that the ratio of positive

returns in pre-holidays and all other trading days is the same. The holidays were Labor Day,

Christmas, New Year’s Day, Queen’s birthday, Easter, ANZAC Day and Waitangi Day. The results

were constant with earlier findings that pre-holiday returns were on average much higher than the

returns on all other trading days. The day before Christmas showed the highest average returns

whereas the day before Easter gave the second highest average returns. The trading day before Labor

Day holiday showed the lowest returns. These returns were even less than the average returns on all

other trading days. The constancy tests showed that pre-holidays average returns were higher on all

other trading days for all the seven periods that were considered.




Wong et al (2006) studied Singapore stock market for pre-holiday effect. The results showed that for

the whole sample period taken for pre crisis period the average pre-holiday returns were much higher

as compared to average returns on all other trading days of the year. The risk and return trade off was

witnessed on pre-holiday days. The results also showed that for post crisis period there was a

significant decline in the difference between average pre-holiday returns and rest of the trading day

returns, which supports the evidence that calendar anomalies are vanishing in Singapore stock market.

Since calendar anomalies have been eliminated from Singapore stock market therefore investors

cannot earn abnormal profits showing that Singapore stock market is becoming more and more

efficient. Wong et al (2006) also studied Singaporean Stock market for January effect. The data

sample was taken the same as for holiday effect. The investigation showed that January average

returns were higher than other month’s average returns for the pre-crisis period. However, the

difference is not very much noticeable. The results also told that average returns for Straits times

Index were negative for the whole time period under study, which shows that January anomaly is

diminishing in Singapore Stock Market confirming the efficiency of SSM (Singapore Stock Market).

Fabozzi et al (1994) provided two possible reasons for explaining the holiday effects. Firstly, their

study says that holiday effect can be related to other seasonality which has already been discovered

like day-of-the-week effect or January effect. For example, holidays can occur on a particular day of

the week or in the beginning or end of the month. Lakonishok and Levi (1982) state that explanation

of holiday anomaly on stock market and day-of-the-week anomaly is the same, but this result is not in

line with observed studies. Therefore it is necessary to study that whether holiday anomaly is caused

by other calendar anomalies (Abidin, 2012). Also the high abnormal stock returns are associated with

the positive holiday sentiment. Positive holiday sentiment is due to the behavior of the people, the

people are looking to the holiday period to enjoy non-working days. That is why many investors take

part in trading (Abidin, 2012). Chan et al (1996) studied Singapore Stock Exchange and Kuala

Lumpur Stock Exchange for holiday anomaly. Their investigation showed that there exists a

significantly stronger holiday anomaly for cultural holidays as compared to non-cultural holidays i.e.

the holidays which have no cultural background. Their study told that cultural holidays had

significantly positive abnormal returns for the studied Stock Exchanges.

Yen and Shyy (1993) studied Hong Kong, Japan, Singapore, Taiwan, South Korea, Malaysian Stock

Market and all those markets which had Chinese New Year holidays for the Chinese New Year Effect

on Asian Stock Market. The researchers studied the sample Stock Exchanges for the period 1976 to

1990. All those countries that had Chinese New Year holidays were taken in this research. The

research data was divided into two window periods. The first window was five days before the

Chinese New Year holidays and second window used the ten days data after the Chinese New Year

holidays. Their study revealed that Chinese New Year Effect has a positive impact on Asian Stock

Market and has significant positive higher returns prior to Chinese New Year holidays and stock

returns go down to their normal position after the Chinese New Year holidays. Ahmad and Hussain

(2001) studied the Kuala Lumpur Stock Exchange for the period 1986-1996. They took the daily

average stock returns. The data was divided into two windows. One window was named as prior to

Chinese New Year and other window as post Chinese New Year. Ahmad et al (2001) used t-test and z-

value for their findings. Their study strongly confirmed the presence of Chinese New Year anomaly.

The results suggested that for both the windows the average the daily returns are greater with respect

to other event window daily average returns. The results were slightly different, they found that

Chinese New Year anomaly took place after the holidays and found that returns are significantly

positive. In case of pre-holiday window returns, the results were not that much significant as




compared to post-holiday returns. Brown et al (2002) examined that cultural factors and Chinese

Lunar Calendar act as important elements in holiday anomaly that affects the investor’s decisions in

Asian Market. The researchers also observed that Chinese New Year Festival is one of the most

important festivals which represent joy and positivity. This festival usually starts from first day of

New Year that is why the stock returns behave abnormally high. Brown et al (1985) also examined

Australian stock market for month-of-the-year anomaly. The results suggested the presence of

December-January and July-August anomaly effects. The researcher explained the July-August

seasonal effect because of June-July tax year. Another study on Chinese New Year holiday anomaly

was performed by Lin (1998) who took five years data for Asian-Pacific stock markets. The data was

taken between 1991 and 1997. The study of Lin (1998) revealed that there exists a Chinese New Year

Effect as the stock returns before Chinese New Year showed abnormal positive returns except from

Nikkei 225 from Japan.

Stepanchuk and Wong (1991) studied the Chinese Lunar Calendar Effect, because most of Chinese

traditional festivals take place in this year. Their study suggested that abnormal high returns are

persistent with Chinese New Year because of the above mentioned reason. Lip (1992) also studied the

Chinese New Year Effect and came to know that Chinese lunar calendar plays an important role in

business decisions since business management take it into consideration and this role is linked to the

superstitions, customs and psychological opinions of the investors. Also they found that Chinese

culture is particularly relevant to Chinese festival date. Chen (1988), Liu (1991), Claessens et al

(1995), Lee et al (1992 & 1993) and Tong (1992) all studied Taiwan Stock Exchange for Chinese New

Year holidays. Their results strongly confirm the presence of February effect in sample stock

exchange which is the effect of Chinese New Year holidays. The results show that average stock

returns before and after Chinese New Year holidays are significantly higher. Wong et al (1990) also

studied KLSE (Kuala Lumpur Stock Exchange) for Chinese New Year Effect. The research took daily

returns of five sectors which included finance, hotels, tins, properties, and plantation. The results

revealed that particular anomaly starts one day before Chinese lunar Calendar which showed the

presence of pre-holiday effect in Kuala Lumpur Stock Exchange for the taken sample. Another

research on Chinese New Year Effect was conducted by Yen et al (2001). The data was taken for the

period of 1991 to 2000. The sample included daily stock returns for six Stock Exchanges which are

South Korea, Malaysia, Taiwan, Singapore, Hong Kong and Japan. The research findings were that

for the entire sample the average returns prior to Chinese New Year holidays and post to Chinese

New Year holidays exhibited an increasing trend compared to normal trading days showing the

presence of strong Chinese New Year Effect in all six stock exchanges. Similarly Sarath, Azuddin and

Diana (2005) also studied Asian-Pacific stock markets for the presence of Chinese New Year anomaly.

The study included Indian, Chinese, Hong Kong, Australian, Singaporean, Malaysian, Indonesian,

Taiwan, Indonesian and Japanese Stock markets. The results show that Chinese New Year effect is

prevalent in four sample countries including Malaysia, Singapore, South Korea and China. Thus

confirming the presence of Chinese New Year holidays anomaly.

Vos et al (1993) studied New Zealand’s stock market for pre-holiday effect. The researchers took daily

stock returns for New Zealand’s stock market. The period of study was from 1967 to 1987. Cao et al

(2009) as described earlier in this paper extended the work of Vos et al (1993). The results of both

researches confirmed the presence of pre-holiday effect in New Zealand. The research found that pre-

holiday average returns are 10.30 times greater than average stock returns on normal trading days.

The results were significant at 10% level. But the study did not confirm the presence of Chinese New

Year effect in New Zealand stock market. Zafar, Urooj et al (2010) studied Karachi Stock Exchange

(KSE) for holiday and half of the Month Effects. The data was taken for the period of 1991 to 2007.




The data was divided into two sub periods based on working days of the week. The first sub-period is

taken from November 1991 to February 1997 and second sub period is from March 1st to December

31st 2007.The holidays taken are eight holidays which also included Islamic Calendar Holidays. The

Islamic Calendar Holidays were first converted into calendar dates and then considered. The holidays

taken were March 23rd

, May 1st, August 14

th, December 25

th; Ashura holidays (Muharram 10

th), Eid-

ul-Fitr holidays (Shawwal 1st), Eid-ul-Azha (Zil Haj 10

th) and EidMiladunNabi (Rabbi ulAwwal 12

th).

For half of the month effect, the month was divided into two halves. The first half of month was

considered from 1st to 15

th day and all the remaining days of the month were considered as second half

of the month. The study used dummy variables and OLS methods. Their results revealed the presence

of both holiday and half of the month anomaly. The researchers came to know that pre-holidays

returns are higher as compared to post-holidays and regular days returns. For the half of the month

effect, the investigation confirmed the presence of this anomaly. In their study they found that the

returns of first half of the month are significantly higher than second half of the month returns.

2.2 Hypothesis

For testing the holiday anomaly hypothesis for the whole study and t-test are formulated separately.

The hypothesis for the overall study is given below and t-test hypothesis is given in t-test explanation.

In order to check holiday anomaly the study has proposed a null hypothesis as follows.

Null Hypothesis (Ho): There is no significant Holiday Effect in Pakistan’s Stock Market.

Alternate Hypothesis (H1): There is significant Holiday Effect in Pakistan’s Stock Market.

3. Data and Methodology

The study examines national holiday anomaly for Pakistani Stock Market. The data is considered for

ten years i.e. 2004 to 2013. Specifically, Karachi Stock Exchange’s 100 index data is used for the

study of this particular anomaly. KSE is a market value weighted index and accounts for about 85% of

total market capitalization. The data of daily stock indices of KSE-100 index is taken from “Institute

of Management Sciences” financial database which is a leading educational institution of

management sciences in Khyber Pakhtunkhwa Pakistan. The data is analyzed for ten years i.e. from

February 1st 2004 to December 31

st 2013. The February 2004 is used as starting period because the

first national holiday for which the study is observed lies in February (Kashmir Day). The daily

closing value of KSE-100 index is used for calculating average daily stock returns. Stock indices are

taken because anomalies are more easily detected in indices as compared to individual shares and also

it reflects the trait and performance of overall market. The data is arranged in MS Excel Sheet and the

average daily return of stock index is calculated using the formula;

Ri=ln (Pt/Pt-1)*100

Where Ri is the daily stock return, ln is the natural log, Pt is the stock index at time “t” and Pt-1 is the

stock index at time t-1.The Pre-Holidays and Post-Holidays daily average returns are then separated in

another excel sheet. In this study the daily stock returns are dependent variable while pre-holidays and

post-holidays are independent variables. The pre-holiday is taken as one day before the holiday on

which trading took place, if the preceding day before holiday was a non-trading day then last trading

day before holiday is considered as pre-holiday. For example in 2004 the last trading day before

February 5th was January 30th, here January30th is considered as pre-holiday instead of February 4

th

and similar is the case for whole data. The post-holiday days are taken as those days which were

following the holiday and trading took place on that day. If the day right after the holiday was not a

trading day then the first trading day after holiday is taken as post-holiday day i.e. in 2004, May 4th

is

considered as the post-holiday for Labor Day because trading day after Labor Day was May 4th




instead of May 2nd. Similarly if the pre-holiday and post-holiday days had weekend holidays before

or after them respectively, the last trading day before national holiday is considered as pre-holiday and

first trading day after holiday is considered as post-holiday. The study tests the holiday anomaly for

six national holidays. The list of national holidays is taken from officeholidays.com. The days on

which KSE remained close is taken from KSE data portal. The Karachi Stock Exchange observes

many calendar holidays which also contains Islamic Calendar Holidays like Eid-ul-Fitr, Eid-ul-Azha,

EidMilad-un-Nabi and Ashura Muharram etc and many other holidays but this study does not include

Islamic Calendar Holidays and other holidays rather it focuses on six national holidays. The study also

do not consider weekend holidays. The six national holidays taken by the study are given in table

below.

For the purpose of analyzing the data in depth, the study also examined national holiday anomaly for

individual year as well as for whole sample period. Every national holiday is also observed separately

to check whether any specific holiday has significant effect on Stock Market or not. The study of

individual holiday separately enables us to understand that which holiday has more anomalous

behavior as compared to other holidays. For the existence of holiday anomaly the study used t-test:

Paired Two Samples for Means. The above mentioned t-test is used to study holiday anomaly for

individual year, individual holiday and whole sample period. The study also calculates Descriptive

Statistics and Correlation for the whole sample period.

3.2 T-Test

The t-test is a type of inferential statistics which is used to determine whether there is a statistically

significant difference between the Means of two groups or not. This test is used when the Means of

two groups are compared. It is especially very appropriate when the analysis is done for two set of

groups. In all inferential statistics we have a dependent variable which we assume to have a normal

distribution. For the existence of normal distribution, a particular outcome of probability is

recognized. Before the collection of data a particular level of significance is recognized which we are

willing to accept. This level of significance is commonly known as (level of significance or alpha

level or p). Most of the times “p<0.05” value is used. The 0.05 value of “p” shows that 5 times out of

hundred, the study will find a statistically significant difference between the Means even if the

difference is by chance. A particular formula is used for calculating test statistics. The value of t-

statistics is then compared with a critical value which is given in a table. The comparison is done to

check out the level of significance that whether the sample results fall within the acceptable level that

we have assumed or not. Nowadays there are certain computer Soft wares like MS Office (MS,

Excel), SPSS etc which calculate t-stat for sample and the result provided by them also show the exact

probability level. The t-test is conceptually the extension of z-scores which provides the standard units

for the difference between Means of two groups. The value of t-test enables a researcher to say with

S.No Date Holiday Description

1 February 5th Kashmir Day

2 March 23rd Pakistan Day

3 May Ist Labor Day

4 August 14th Independence Day

5 November 9th Iqbal Day

6 December 25th Quaid-e-Azam Day/Christmas

Table 1: Studied Holidays




certain degree of confidence that the Mean difference between the two groups is either by chance or

the difference is actually present in the taken sample. The one-way Analysis of Variance (ANOVA), a

form of regression analysis and t-test are mathematically equal and would give similar outcomes. The

formula used for calculating the value of t-test is;

𝐭 − 𝐭𝐞𝐬𝐭 =𝐗 𝐚 − 𝐗 𝐛

𝐯𝐚𝐫𝐚

𝐧𝐚+

𝐯𝐚𝐫𝐛

𝐧𝐛

In the above equation 𝑋 a represents the Mean of first variable, 𝑋 b shows the Mean of second variable,

vara is the variance of first variable and varbis the variance of second variable. Also narepresents the

number of first variable and nb represents the number of second variable. The value of t is positive if

the Mean of first variable is greater and negative if the Mean of first variable is less than the Mean of

second variable.

3.2.1 Method used for finding national holiday anomaly

𝐭 − 𝐭𝐞𝐬𝐭 =𝐗𝐩𝐫𝐞 − 𝐗𝐩𝐨𝐬𝐭

𝐯𝐚𝐫𝐩𝐫𝐞

𝐧𝐩𝐫𝐞+𝐯𝐚𝐫𝐩𝐨𝐬𝐭

𝐧𝐩𝐨𝐬𝐭

Formula of t-test used by the study for Pre-Holiday and Post-Holiday Anomaly

The above model is used by the study for finding the Pre and Post National Holiday Anomaly. In the

above equation Xpre represents the Mean return of pre-holidays, Xpost represents the Mean return of

post-holidays, 𝑣𝑎𝑟𝑝𝑟𝑒 is the variance of pre-holidays, 𝑣𝑎𝑟𝑝𝑜𝑠𝑡 is the variance of post holidays, npre is

the number of pre-holiday observations and npost is the number of post-holiday observations. The

results of t-test are given in table 3 in empirical findings chapter.

3.2.2 T-Test Hypothesis

The study has formulated the hypothesis for t-test as follows;

Null Hypothesis: There is no significant mean difference between average returns of pre-holidays

and post-holidays or the mean is equal.

i.e. P > 0.05, t-stat < t-critical

Alternate Hypothesis: There is significant mean difference between average returns of pre-holidays

and post-holidays or the mean is unequal.

i.e. P < 0.05, t-stat > t-critical

In order to reject null hypothesis the P-value must be less than 0.05. If the P-value is greater than 0.05

then the study cannot reject null hypothesis which means that there is no significant mean difference

between pre and post-holidays returns. Also for the rejection of null hypothesis the value of t-stat

must be greater than t-critical. If the value of t-stat > t-critical then we can reject Ho otherwise not.

4. Empirical Findings

This section contains the findings of the study. The study conducted t-test, correlation test and

descriptive statistics. The results of all these tests and their interpretation are given in this section.




4.1 Descriptive Statistics

Descriptive statistics is a statistical tool used for showing the basic features of data taken in a study.

Descriptive statistics present a simple summary of taken sample. They provide a base for quantitative

analysis of data. Descriptive statistics and inferential statistics are two different things. Inferential

statistics enable us to reach conclusions beyond the data available, whereas Descriptive statistics

simply explain what is shown by data and what is included in the data. Descriptive statistics simply

shows what is going on in the data. Descriptive statistics ensure presentation of quantitative data in a

manageable form. During the process of research a considerable amount of measures are taken,

descriptive statistics enables us to present large amount of data in a sensible and simplified manner.

Every set of descriptive statistics is a summary of large sample of data. The descriptive statistics

include a number of techniques which are used for the representation of whole data. These techniques

include Mean, Median, Mode, Range, Variance, Standard Deviation etc. Mean is the sum of all

numbers in a data divided by number of observations. Median is the middle number of sample. Mode

is the largest number in data sample. Range is obtained by subtracting the largest number of sample

from smallest number of sample. Variance is the sum of squares of numbers subtracted from mean

divided by one less than total number of observations whereas Standard Deviation is the square root

of variance. The Descriptive Statistics for Pre-holidays and Post-holidays for the 2004 to 2013 period

are mentioned in Table 2.1 and Table 2.2 respectively;

Table 2.1 Pre-Holiday

Table 2.1 shows the descriptive statistics of the daily returns of KSE-100 index for pre-holidays which

includes Mean, Median, Standard deviation and No. of observations for the pre-holidays from 2004 to

2013 period. The table shows that over the sample period, mean of pre-holidays for the taken sample

is 0.0876 which means that mean average return for pre-holiday is 0.087 representing 8.7% daily

average returns for pre-holidays. This statistics mean that for all the national holidays the average

stock returns before one day of national holiday is 8.7% for the whole sample period. The average

Mean stock returns of pre-holidays for the entire period are positive. The lowest pre-holiday return for

the sample period is -4.49 whereas 2.74 is recorded as the highest pre-holiday return. The standard

deviation of pre-holidays is 1.33. The No. of observations is 60 because the study took six national

holidays for ten years in Pakistan.

Mean 0.08745

Median 0.16452

Standard Deviation 1.33149

Sample Variance 1.77287

Range 7.22759

Minimum 4.49130

Maximum 2.73628

Count 60




Table 2.2 Post Holiday

Table 2.2 shows the descriptive statistics for daily returns of KSE-100 index for post-holidays. The

data under study was from 2004 to2013. The table contains descriptive statistics including Mean,

Standard Error, Median, Standard Deviation, Variance, Range, and No. of observations for post-

holidays for the data sample. The table shows that the average returns for post-holidays are recorded

as 0.055 which means that daily average post-holiday return is 5.5%. This means that first day of

trading after holiday has an average return of 5.5%. The average return for the whole sample period is

positive. Comparing Mean returns for both pre-holidays and post-holidays the study find that average

pre-holidays returns (0.087) are slightly greater than average post-holiday returns (0.055) with a

difference of 0.032. However, the difference between the Mean returns is not so significant. The

Median of post-holidays is 0.1718 which represents the middle value of the sample. The range of

post-holidays is 13.085. The minimum value of post-holidays recorded is -8.814 while the maximum

value is 4.270. The Variance of sample is 3.219 with Standard Deviation of 1.794.

4.2 Correlation

Correlation is a statistical technique which shows that to what extent a pair of variables is related to

each other. It is a combination of two words Co meaning “together” and relation, therefore it is

obvious from the definition that it shows the relationship between two or more variables. Correlation

enables researchers to better understand the data set. The result of correlation co-efficient is usually

known as correlation coefficient denoted by “r”. It is also known as Pearson Coefficient. This

coefficient is commonly used for the calculation of correlation between two variables. The value of

correlation coefficient ranges from -1 to +1. If the value of r is close to -1 or +1 it means that there is a

strong correlation between two variables. If r is 0, it suggests that there is no relationship between the

two variables. A positive “r” value shows that an increase in one variable causes an increase in

another variable as well and a negative r value reveals that as one variable increases it causes a

decrease in another variable often known as “inverse” correlation. Correlation coefficient is generally

reported between -1 and +1. When we square the value of “r” it becomes easier to understand. The

square of correlation coefficient shows the percentage variation in one variable regard to another

variable. In the table below is the correlation between pre-holiday and post-holiday returns for the

taken sample period.

Table 3: Correlation between Pre-Holiday and Post-Holiday

Correlation Post Holiday Pre-Holiday

Post-Holiday 1

Pre-Holiday 0.39125 1

This study has also conducted a correlation test in order to check whether both these variables (pre-

holiday returns and post-holiday returns) have a relationship with each other or not. The correlation

Mean 0.05510

Median 0.17180


Sample Variance 3.21901

Range 13.08501

Minimum 8.81436

Maximum 4.27065

Count 60




test was performed that a variation in one variable causes how much variation in another variable. The

correlation test of pre-holidays and post-holidays was performed using MS-Office “Excel”. The

results of correlation are shown in table 2. The table 2 shows that correlation coefficient between pre-

holidays and post-holidays for the sample period is recorded as 0.39%. This means that there is a

weak to medium positive linear relationship between returns of pre-holidays and post-holidays. To

interpret the results in exact manner, we can say that a 100% increase in the returns of pre-holidays

brings about a 39% increase in post-holidays returns which shows that both pre-holidays and post-

holidays returns move positively with each other. The pre-holiday returns have a positive relationship

with post-holiday returns and that both returns move along positively.

Table 4.1: t-Test: Paired Two Sample for Means

Pre-Holiday Post-Holiday

Mean 0.08745 0.0551

Variance 1.77287 3.21901

Observations 60 60

Pearson Correlation 0.39125

Hypothesized Mean Difference 0

Df 59

t Stat 0.14182

P(T<=t) one-tail 0.44385

t Critical one-tail 1.67109

P(T<=t) two-tail 0.8877

t Critical two-tail 2.00099

4.3 T-Test Results

Table 4.1 displays the t-test results conducted by the study for the presence of national holiday

anomaly in KSE 100-index for the period of study. It is quite obvious from the table that there is no

significant Mean difference between the returns of pre-holidays and post-holidays. The Mean of both

variables are already discussed in detail. The table also shows that p-value is 0.88 which is quite

greater than 0.05, which means that on the basis of this result the study cannot reject the null

hypothesis, which states that there is a no significant Mean difference between pre-holidays and post-

holidays returns. For the rejection of Null Hypothesis it was important that the p-value should have

been less than 0.05 (p<0.05) which is not the case here. Also looking at the value of t-stat one can

easily see that t-stat value is less than t-critical (0.14182< 2.00099) which again confirms that there is

no significant Mean difference between pre-holidays and post-holidays. Therefore, based on these

results the study cannot reject Null Hypothesis, which means that the National Holiday Anomaly does

not exist in Pakistani Stock Market, specifically in KSE-100 index for the studied period (2004-2013).

Therefore the evidence provided by this study suggests that Pakistani Stock Market is an Efficient

Stock Market with respect to national holidays for the taken sample period where the securities are

fairly priced and no one can outperform the market with respect to National Holidays.

The results of t-test are not in conformity with previous literature. Zafar et al (2012) studied holiday

effect in Pakistani Stock Market. Their results confirmed the presence of holiday anomaly in Pakistani




Stock Market. The difference in results of this study and Zafar et al (2012) may be due to different

types of holidays taken by the studies. Also another factor can be sample periods taken. Zafar et al

(2012) studied holiday anomaly from 1991-2007 whereas this study tested data for 2004 to 2013.

Zafar et al (2012) in their study also included Islamic Calendar Holidays, while this paper investigates

holiday anomaly for six national holidays and does not consider Islamic Calendar Holidays. These

may be the reasons for the change in results. One possible explanation for the absence of National

Holiday Anomaly is that in modern days the national holidays are not celebrated in that way as were

in past. The February 5th is Kashmir Day, which is solidarity with the people of Kashmir. The investor

does not think that this day can have an impact on stock market. Similarly March 23rd

, May 1st,

November 9th and December 25

th are also such holidays which are not celebrated with great interest

and also no such activity is surrounded by these holidays which can affect the decision process of

investors. August 14th is also included in this study but it too doesn’t seem to have a great impact on

Stock Market. The Islamic Calendar Holidays have more impact on Pakistani Stock Market because it

is obvious that in Ashura’s Days (Muharrum 9th& 10

th) the law and order situation is very critical and

investors want to sell their stocks because they fear that the prices may come down. Similarly in Eid-

ul-Azha (Zul-Haj 10th) the investors want to sell their stocks because every Muslim needs money to

perform slaughter. This is why the results shown by this study elucidates the absence of national

holiday anomaly in Pakistan’s stock market.

Table 4.2: T-Test Year wise Comparison of Means for Pre-Holidays and Post-Holidays

T-Test Results (P-value)

Two Tail

T-Stat

Value

T-Critical

Value S.No Year

1 2004 0.83986 -0.0213 2.57058

2 2005 0.2272 1.37619 2.57058

3 2006 0.58306 -0.5864 2.57058

4 2007 0.69614 -0.4138 2.57058

5 2008 0.147 -1.715 2.57058

6 2009 0.86334 -0.1812 2.57058

7 2010 0.4214 0.87541 2.57058

8 2011 0.03159 2.95794 2.57058

9 2012 0.42294 -0.8723 2.57058

10 2013 0.3924 0.93565 2.57058

11 2004-

2013 0.8877 0.14182 2.00099

In order to study the anomaly in detail t-test was performed for every year of sample period and for

each individual holiday as well. The results of each year and individual holiday separately are given in

table 4.2 and 4.3 respectively. The value of t-critical for each individual year is same i.e. 2.57058 and

different for the whole sample period 2.00099. The t-critical value is same for each individual holiday

as well i.e. 2.26216. The study of individual years shows that for most of the years the value of p is

insignificant i.e. greater than 0.05 and also t-stat is less than t-critical. The year 2011 is an exception

which has a significant value where the p-value is 0.03159 which is less than 0.05 and t-stat (2.95794)

is also greater than t-critical (2.57058) showing the presence of National holiday anomaly in 2011.




For every other year the p-value is insignificant revealing the absence of national holiday anomaly on

year wise basis except for 2011.

Table 4.3: T-Test Results for Individual National Holiday from 2004 to 2013

Holiday 5-Feb 23-Mar 1-May 14-Aug 9-Nov 25-Dec

P-value

Two Tail 0.57085 0.49224 0.97241 0.77804 0.64649 0.65189

T-Stat 0.58821 -0.7159 -0.0335 0.29047 0.47442 0.46657

T- 2.26216 2.26216 2.26216 2.26216 2.26216 2.26216

Critical

Each national holiday was also studied separately using t-test paired two samples for Means in order

to check that whether any specific holiday has significant value or not. The p-values given by t-test for

February 5th, March 23

rd, May 1

st, August 14

th, November 9

th, and December 25

th are 0.57085,

0.49224, 0.97241, 0.77804, 0.64649 and 0.65189 respectively. It is quite obvious that there is no

significant p-value. All the values of p are greater than 0.05 which indicates insignificance. This

means that no national holiday shows significance which again confirms the results of earlier study

that national holiday anomaly is not present in Pakistani Stock Market for the taken sample period

based on the evidence provided by this investigation. The results for individual holidays also suggest

that there is no particular holiday which shows sign of holiday anomaly. This show that national

holiday anomaly is not present in Pakistani Stock Market for the sample period neither on individual

holiday basis nor for the entire studied period. The study of each individual year also does not show

the presence of national holiday anomaly except for 2011.

5. Conclusion

This study analyzed Pakistani Stock Market specifically Karachi Stock Exchange (KSE) 100 index for

National Holiday Anomaly. The focus of this study is to determine the presence of National Holiday

Anomaly in Pakistani Stock Market. For this purpose the pre-holidays and post-holidays daily average

stock returns of six national holidays are considered for ten years data. The sample period taken is

from 2004 to 2013. The study has employed t-test Paired Two Sample for Means for the presence of

holiday anomaly. The analysis of holiday anomaly revealed that there is no significant difference

between the returns of pre-holidays and post-holidays for the taken sample period which is in contrast

to the findings of Zafar et al (2012) which found significant pre-holiday returns. The change in result

may be due to the different types of holidays considered by both studies and/or different data sets. The

investigation also examined pre-holidays and post-holidays returns for each individual holiday and

individual year as well. The results for both individual holiday and individual year also do not show

any significant Mean difference between both variables. The study explains this phenomenon as the

lack of importance given to these national holidays by investors, as there is no particular activity

surrounded by these national holidays which the investors consider can have an impact on their

investment decisions. Therefore based on the evidence provided by this study, the investigation can

say that Pakistani Stock Market is an efficient stock market with regards to the national holidays for

the taken sample period. However, there are certain other factors which are not considered by the




study. The results of this study should not be considered as a reflection of the whole Pakistani Stock

Market. This study contributes to the existing evidence on holiday effect and provides fresh insights

about Pakistani Stock Market. Overall this study contributes to our understanding of efficiency of

Pakistani Stock Market.

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Rehman, Shahzad, Khan & Khwaja 58 ISSN: 2520-0739

Factors of Employee’s Well Being and its Impact on Employee’s Turnover Intention and

Organizational Commitment: A Case Study of PTCL, Peshawar

MUZAMMIL REHMAN

Lecturer, Institute of Computer and Management Sciences, Peshawar

[email protected]

SAQIB SHAHZAD Lecturer, City University of Science and I.T, Peshawar

PhD-Scholar, Institute of Management Sciences, Peshawar

[email protected]

ZUNNOORAIN KHAN Lecturer, City University of Science and I.T, Peshawar

PhD-Scholar, SZABIST, Islamabad

[email protected]

HAMZA KHWAJA Lecturer, City University of Science and I.T, Peshawar

MS-Scholar, Institute of Management Sciences, Peshawar

[email protected]

Abstract

New and exciting innovations and latest information technologies have come along to shape our

approach to employee wellbeing, but our attitude has always remained the same. Societal people who

are drive our success. So, we can strive to maintain a healthy and happy culture, and create

environments in which everyone can flourish. Employees are considered as important resource

working for organizational success and growth in the market. Organizations respond effectively for

social interest. This study is about factors of employee’s wellbeing, turnover intention and

organizational commitment. This is cross sectional causal study associated with survey questionnaires

collected from employees of PTCL, Peshawar.

Keywords: Employee’s Wellbeing, Turnover Intention, Organizational Commitment.

1. Introduction

Today, in the presence of highly competitive business environment, human resource department of

smart organization are looking for talented and qualified employees for accomplished their goals

within define time frame (Mondy, Wayne, Robert, Noe, & Shane, 2012). It is analyzed that employees

are considered as important resource and valuable asset for organizational success and growth in the

market. Without employee’s contribution and efforts it is very difficult for organizations to achieve

their goals and objectives which their top level management set in their minds. Eisenberger, Robert,

Peter and Valerie (2012) suggested that organization working employees are associated with global

beliefs and are more concerning about values, their contribution and cares about their employee

wellbeing. This factor of employees wellbeing is considered as the support of organization which

directly reduces the absenteeism of employees within their current network, create strongly

relationship with management and employees shows their best productivity for more organization








success in the market (Warr & Peter, 2013).The process of employee wellbeing is considered as an

important element for organization effectively operates their functional activities in the market.

Human resource manager of the organization is an individual who normally acts as an advisory, staff

capacity and also working with other managers regarding to human resource matters (Wayne, Judy, &

Robert, 2013). These human resources matters are working under the strong consideration of

organization workplace environment, increases employee job security, develop strong relationship and

cooperation with colleagues, socialization and paid them satisfied salaries for increasing their

motivational level (Ramlall & Sunil, 2004).

Now a day, most of the smart organizations top level management is working on increasing

employee’s motivation level for reducing turnover intention from their system. It is true employees

motivation is highly dependent upon compensation, benefits, attractive salaries, special allowances

and many other functional activities performed which directly as well as indirectly connected with

organizational commitment (Bakhshi, Arti , Kuldeep & Ekta , 2009).Organization commitment is

based on management justice with working employees. Organization justice with employees plays a

very progressive role for turnover intentions (Mobley & William , 2014).Organization operations

works with the support of standard operating procedures and policies for products and services

practically implement in the market. Organization managers are primarily responsible for coordinating

with management of resources to help the organization for accomplished their goals. Organizations

respond effectively for social interest. This social interest is known as social responsibility. This social

responsibility is to be implied enforced of managers acting and reacting to their official capacity for

serving best in the organization (Friedman & Milton, 2010).


Pakistan’s complex and highly competitive environment has raised the standards of the works and

have increased burden over the employees. On the other hand, Pakistan being a developing country

and highly low economic growth generates low profits for the business organizations, due to which

organizations are unable to meet their expenses and increase the salaries of their employees, which

has overall resulted in the increasing of the employee turnover rate. This research is revolving around

to investigate the factors of employee's wellbeing and their impact on turnover intention and

organizational commitment.

1.2 Research Objectives

The research objective of this paper is revolving around “to identify and examine the employee’s

wellbeing, working environment and job security impact on turnover intention and organizational

commitment”. And “to explore and analyze cooperative of colleagues, processes of socialization and

satisfaction with salaries of employees impact on turnover intention and organizational commitment”.

1.3 Originality of the Study

The originality of study is based on various factors related to employee’s wellbeing for determining

the impact of turnover intention and organization commitments. Study originality is revolving around

employee’s wellbeing factors are working environment of organizations, provide employee job

security, management of organization is cooperated with colleagues, practically implementing the

concept of socialization and increasing employees satisfaction through salaries which highly




influences on turnover intentions and organizational commitment. In this research is composed of

remaining four sections. Second section is about related research, designed and development of

theoretical framework model and formulation of suggested hypotheses. Third section is research

methodology in which the researcher design methodology in accordance to determine various factors

related to employee’s wellbeing impact on turnover intentions and organizational commitment. Forth

section is data analysis, result and finding associated with hypotheses testing and determining the

impact through regression analysis. In the last section is about conclusion and recommendation which

is based on more improving the current system of organization in term of reducing turnover intention

and increasing organization commitment.


Today, smart business organization needs employee engagement (Harter, James , Frank, Schmidt, &

Theodore, 2012). Employees play a very important role in any organization working all around the

globe (Mondy, Wayne, Robert, Noe, & Shane, 2012). In accordance to the past literature, it is

observed that organization top management participation converted their vision into reality through

employee’s contribution. Organizations are facing high competitive demands for evaluation the lower

costs, need employee high productivity and greater flexibility, organizations are increasing turning to

employee involvement (Harter, James , Frank, Schmidt, & Theodore, 2012). The process of employee

involvement is to enhance the overall organization operational functions based on commitment. In any

organization employee’s contribution plays a very progressive role leading toward product or services

success in the market. The effectiveness of organizational parallel structure is highly dependent upon

high level of involvement associated with members (Jones & Gareth , 2010). So, it is analyzed that

communication organization purpose, procedures, compensation and special allowances can only

promote that employee contribution, moreover employee organization participation is designing and

developing the organizational structure transformed vision into reality of owners. These factors

improve scale of economy in term of evaluation of new ways of working (DeDee, Kim, Douglas , &

Vorhies, 2014). This continued effective communication within the organization is very effective for

parallel structuring well performed operational activities can ensure the member awareness.

Vakola, Maria and Ioannis (2010) suggested that employee’s attitude plays a very dynamic role

towards organizational change. The process of organizational change is highly dependent upon

employee’s involvement, decision making power, abilities, capabilities and many other related

activities performed in the favor of organization success, value and worth in the market. In this study,

the researcher emphasis is on occupational stress and brings parallel in organizational structural

change. Both of these two major aspects considered as very important element for minimizing the

issues associated with organizational life (Mohrman, Susan , Susan & Allan, 2010). The result of this

study is based on linkage between employee’s behavior and attitudes towards the work which directly

as well as indirectly connected with organizational change significantly constructs organizational

behavior, occupational stress and organizational commitment as well. Mostly, the system of

organizations is open in nature, which relate to working environment (Houtman, Irene, Jettinghof &

Leonor, 2007). The system of organization is must require effective resources and valuable

information that needed to well performed their functionality and must deliver the quality oriented

products or services as per requirement of people expectations (Zeithaml, Valarie , Leonard , Berry &

Aranth, 2013). It is analyzed that most of the organizational structure is associated with rapidly

change and having complex situation for require organizational response different from those in

environments that are considered as more stable and simple in term of accommodate their resources.

Strong relationships with colleagues shows high level of organization commitment and reduce the




element of employee turnover intention from their system.

2.1 Hypotheses

H1: Employee’s wellbeing is positively associated with turnover intention and organizational

commitment.

H2: Working environment is positively associated with turnover intention and organizational

commitment.

H3: Job security is positively associated with turnover intention and organizational commitment.

H4: Cooperation of colleagues is positively associated with turnover intention and organizational

commitment.

H5: Socialization is positively associated with turnover intention and organizational commitment.

H6: Satisfaction with salary is positively associated with turnover intention and organizational

commitment.

Figure 1: Theoretical Framework

Theoretical framework model of this research is extracted through past and similar literature, theory

and related model. This theoretical framework model is composed of two main variables. First one is

independent variables and second one is dependent variable. In accordance to theoretical framework

model independent variables are employee’s wellbeing, working environment, job security,

cooperative of colleagues, socialization, and satisfaction with salary, whereas dependent variable is ,

turnover intention and organizational commitment.


Research methodology is designed and developed in accordance to determine the various factors of

employee's wellbeing and their impact on turnover intention and organizational commitment. In this

paper, the researcher emphases is on employee’s wellbeing factors such as working environment,

employees job security, cooperation with colleagues, increasing the process of socialization and

satisfied salaries. These entire factors of employee’s wellbeing are normally used for reducing the

turnover intention and increasing organization commitments. Quantitative research approach is to be

used for effectively analyzed the survey data results. Type of research methodology is correlation in

nature. In this correlation research methodology the researcher determines the impact evaluated in

term of turnover intention and organization commitment. Design of research is based on various

factors related to employee’s wellbeing, turnover intentions and organization commitment. In this

Working

Environment

Turnover intention

and Organizational

Commitment

Employee’s

Wellbeing

Satisfaction with

Salary

Job Security

Socialization

Cooperation of

Colleagues




research design the researcher transformed his or her full knowledge, idea and information into

meaning full form. This research design is according to framework model where variables play their

own role for impacting the turnover intentions and organization commitments.

3.1 Sampling Procedure

Simple random sampling technique was used in this paper for data collection. Sample size limit is not

more than two hundred and fifty (250) employees working in different offices of Pakistan

Telecommunication Company. There are two types of data collection technique is to be used for data

processing. First type of data collection is primary source of information associated with

questionnaire techniques and other one is secondary source of information. This secondary source of

information is based on related journals, articles, model and theory which are helpful for researcher

for design the framework model of this paper. Research design focuses on the collection of research

data and transformed it into meaningful form with the support of various software like SPSS

(Argyrous, 2009). The main functionality of SPSS software is use for testing of hypotheses by

applying correlation analysis and determines the impact of turnover intention and organizational

commitment through multiple regression analysis models.

4. Results and Findings

This data analysis, results and finding are plays a dynamic role leading towards the completion of

research paper. This data analysis, result and findings are composed of two statistical tests. First one

statistical test is about correlation analysis which is used for testing of suggested hypotheses and

second one is multiple regression analysis models for determining and analyzing the impact of all the

independent variables on dependent variable. These results and finding are given below:

Table 4.1: Correlation Analysis

Employee’s

Wellbeing

Working

Environment

Job

Security

Cooperation

of

Colleagues Socialization

Satisfaction

with salary

Turnover

intention and

Organization

commitment

Employee’s

Wellbeing

1

Working

Environment

.674**

1

Job Security

.614**

.489**

1

Cooperation

of Colleagues

.481**

.452**

.861**

1

Socialization

.479**

0.158 .369**

.447**

1

Satisfaction

with Salary

0.079 0.131 .421**

.483**

0.112 1

Turnover

intention and

Organization

Commitment

.941** .556** .502**

.550**

.655** .966**

1




This correlation analysis is used for testing of suggested hypotheses derived from framework model.

In accordance to the first research hypothesis is about employee’s wellbeing is positively associated

with turnover intention and organizational commitment. The correlation value of employee’s

wellbeing, turnover intention and organization commitment is .941** and level of significant i-e

0.000. Second research hypothesis is about working environment is positively associated with

turnover intention and organizational commitment. The correlation value of working environment,

turnover intention and organization commitment is .556** and level of significant i-e 0.000.

Figure 2: Pearson Correlation

Third research hypothesis is about job security is positively associated with turnover intention and

organizational commitment. The correlation value of job security, turnover intention and organization

commitment is .502** and level of significant i-e 0.000. Forth research hypothesis is about

cooperative of colleagues is positively associated with turnover intention and organizational

commitment. The correlation value of cooperative of colleagues, turnover intention and organization

commitment is .550** and level of significant i-e 0.000. Fifth research hypothesis is about

socialization is positively associated with turnover intention and organizational commitment. The

correlation value of socialization, turnover intention and organization commitment is .655** and level

of significant i-e 0.000. Sixth research hypothesis is about satisfaction with salary is positively

associated with turnover intention and organizational commitment. The correlation value of

satisfaction with salary, turnover intention and organization commitment is .966** and level of

significant i-e 0.000. Hence, all hypotheses are proved and support this model.

Table 4.2: Model Summarya

Model R R Square Adjusted R Square Std. Error of the

Estimate

1 .966a .933 .929 .54348

a. Predictors: (Constant), Employee’s wellbeing, working environment, job security, cooperative of

colleagues, socialization, satisfaction with salary, turnover intention and organization commitment.

Predicators of model summary are various factors of employee’s wellbeing used for determining the

impact of turnover intentions and organization commitments. In accordance to the results, it is

determined

0

1

2

3

4

5

6

1 2 3 4 5 6 7

Imp

act

PC

Variables

Turnover and Organization Commitment

Satisfaction with Salary

Socialization

Cooperative of Colleagues

Job Security




that the value of regression i-e .966, R square i-e.933 and adjusted R square i-e .929. Hence, all the

value of model summary is support the values of regression.

Table 4.3: ANOVAb

Model Sum of

Squares

df Mean Square F Sig.

1 Regression 578.189 9 64.243 21.7503 .000a

Residual 41.351 141 .295

Total 619.540 150

a. Predictors: (Constant), Employee’s wellbeing, working environment, job security,

cooperative of colleagues, socialization, satisfaction with salary, turnover intention

and organizational commitment.

Figure 3: Regression Analysis

Anova result is used for determining the impact of variables derived from model. In accordance to the

results, frequency is denoted by F i-e 21.75% shows variances in the model at the level of significant

i-e 0.000.The values of regression and residual in term of sum of square i-e (578.189 and 41.351), df

i-e (9 and 141) and mean square i-e (64.243 and .295). Hence, all the values are considered as good

for analyzing the impact of turnover intention and organization commitment.

5. Conclusion and Recommendations

It is concluded that employee wellbeing is considered as an important factor for organizational growth

and success in the market. Today, in the presence of highly competitive business environment most of

the well-known organizational top management is looking into the matter especially for employee’s




wellbeing. It is true when an employee of any organization is wellbeing then automatically

organization leading towards success and also gaining high competition in the market. Top

management contribution in any organization plays effective role for managing and controlling

various operational functions activities related to socialization and paid them satisfied salaries for

increasing their motivational level of employees. So, the policies and procedure of organization

design and innovation of products and services are generated to support the corporate strategy and

values. So, transformational change is invariably affects many organizations in term of internal and

external stakeholder which including the owner, managers and customers. It is highly recommended

that organization should focus more on creative working environment. So that employee’s wellbeing

retained and show more organizational commitment. This factor is also reducing the employee’s

turnover intention and show more organizational commitment. Organization commitment is

associated with employee performance, policies and procedure in which organization works and

gaining high competition in the market. The management of the organization has to develop policies

to improve employee’s wellbeing so that employee’s turnover intention is to be minimized and

improved.

5.1 Future Research

This research is about “factors of employee's wellbeing and their impact on turnover intention and

organizational commitment” completely revolves around employee’s attitude, behavior, business

ethics, norms, values and many other related activities performed. More research studies should be

conducted on the broader perspective and also practically implemented in various setup of

organizations considering different research environments and parameters as well.

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Ullah, Ilyas, Khan & Khan 67 ISSN: 2520-0739

The Impact of Capital Structure on Islamic Banks Performance: Evidence from

Pakistan

ATTA ULLAH

MBA Student, Abdul Wali Khan University, Mardan

MUHAMMAD ILYAS

Lecturer, Abdul Wali Khan University, Mardan

[email protected]

IHTESHAM KHAN

PhD Scholar, Islamia College University Peshawar

[email protected]

MUHAMMAD TAHIR KHAN

Lecturer, Abdul Wali Khan University, Mardan

[email protected]

Abstract

This study investigate the impact of capital structure on the Islamic banks performance during 2008-

2013. Selected a sample of 5 Islamic banks on the basis of availability of data. From the findings of

the study demonstrate that the impact of capital structure and size is positive and significant on

Islamic banks performance. However, Assets Growth is negatively and statistically non-significantly

associated with banks performance.

Key Words: Return on Equity, Capital Structure, Size and assets Growth.

1. Introduction

Capital structure is the combination of debt and equity that a firm uses to finance its business

(Damodaran, 2001). Miller and Modigliani (1958) recommended that, under perfect capital market,

there is no change in debt and equity financing as regard to the value of the firm. Hence, financing

choice adds no value. Evidence recommended that this does not hold in reality. Although, capital

structure is one of the essential financial decisions for any corporate firm. Furthermore, the impact of

capital structure choice will help the firm’s ability to deal with its competing situation. Moreover,

capital structure of a corporate organizations is a combination of equity and debt that a firm uses to

improve its business operation. Therefore, specific strategy of a firm should deal with the suitable

combination of equity and debt to finance its assets. Capital structure decisions, not only involve

investment decisions for a business organization. It includes a massive amount of funds and has long

term implications for a corporations. However, Modigliani and Miller (1958) examined and discussed

that capital structure is not relevant in an ideal situation, a capital market with, investor’s

homogeneous expectations no transaction costs associated with debt and no taxes.

In 1963, Miller and Modigliani proposed the presence of corporate taxes a firm apply debt as much as

possible in order to increase firm value by increasing the tax shield benefits. The capital structure

decision with the firm performance was suggested in several numbers of theories include the tradeoff







theory, pecking order theory and agency cost theory. Pecking order theory suggest that firms will

mainly rely on inside funds and if the funds are not enough to meet organizational goals then they will

go for debt financing and at the end issue equity to cover any remaining requirements (Majluf &

Myers, 1984). Gleason, Mathur and Lynette (2000) recommend that use of various levels of equity

amount and debt amount in the firm’s capital structure is one of the firm exact strategies utilized by

executives to increase firm’s profitability. Therefore, organizations try to develop its competitive edge

in the marketplace through a combination of equity and debt (Myer, 2001). James and Headlock

(2002) concluded that corporate firms prefer debt financing because they assume a higher return.

Moreover, leverage improve firm performance (Champion, 1999).

A number of studies was elucidated to analyze the subject to examine the impact of capital structure

on organization profitability. Some studies prove that there is positive impact of capital structure on

organization performance. Roden and Lewellen (1995) revealed significantly positive association

between capital structure and organization performance. Moreover, same results demonstrate by

(Berger and Patti (2006); Chien and Cheng (2010); Jang and Park (2013) Psillaki and Margaritis

(2007). However, some of the studies conclude inverse relationship between capital structure and

firm financial performance. (Chakraborty, 2010; Ebaid, 2009; Gleason, 2000; Hayajneh & Soumadi,

2012; Paudyal & Guney, 2008). Mujahid and Malik (2014) banks play a primary role in the

economic performance through their financial intermediation function, monetary policy mechanism

and in providing economic stability.

Globally various research work conducted to investigate the impact of capital structure on Islamic

banks performance in different region with a different time periods. However, limited number of

studies done due to the fact that data of Islamic banks have been unavailable due to their recent

growth (Merchant, 2012). In the context of Pakistan small research work is investigated. Therefore,

this study pursued to fill the research gap and to investigate the Impact of capital structure on the

financial performance of Islamic banks in Pakistan.


Miller and Modigliani (1958) the widely known theory of “capital structure irrelevant proposition”

presented that leverage does not influence the organization value under perfect market situation.

Miller and Modigliani indicated that in ideal world there is no transaction cost associated with funds

raising, no tax effect and all information provided by organization is reliable then capital structure

does not influence an organization value. Hamaada (1969) and Satiglitz (1974) support the theory.

However, this theory was based on expectations which in contradiction with real world. Where

organizations generally utilize an optimum level of debt (Campello, 2006). Miller and Modigliani

Irrelevancy theory of has been criticized on the base of the Irrelevance theory undertakes perfect

market situations and balanced economic behavior according to Chaganti et.al. (1995) theory

restricted and only applicable for small business firms. After their initiative demonstration present that

capital structure is irrelevant to organization value, In 1963 Miller and Modigliani reviewed their

theory of capital structure by adding corporate tax assistances as an element of the capital structure.

In this new aspect, important component of taxation is the recognition of interest as tax deductible

expenditure. To support this dispute, Miller and Modigliani describe that a firm increase debt

financing will partially benefit from low tax payment called tax shield. M&M indicate that a firm

increase its debt financing can get more profit and increase firm value because increase in debt

finance also increase the tax shield benefits for the firms.




M&M theory support for other theories that are proposed by other scholars with the attention of other

market limitations. Majluf and Myers (1984) elaborated this theory they says that a firm will primarily

depend on internal source of financing, no chance of information asymmetry firm will produce high

returns are expected to utilize less debt. In addition, Mackling and Jensen (1976) has advanced agency

theory where they conclude that agency costs are those costs that are attached the agent, monitoring

expenses by the principal and an outstanding loss. The presence of agency problem arises owed to the

clashes among business executives and shareholders or between debt holders and shareholders, to

reduce the agency cost use of debt more reliable tool for it. Leverage can force executives to produce

and pay out cash, just because interest expenses are mandatory. Interest expense will decrease the

amount of residual cash flows. Thus, debt is observed as a sensible method to decrease the agency

costs. Newman and Kinsman (1998) recommended that advanced levels of debt are associated with

lower firm performance based on the association amongst three analyzes of debt level. The finding

reveals that short-term debt was negatively associated with earnings but positively associated with

long-term debt. Though generally results determine an opposite association between debt and firm

performance. Chhibber and Majumdar (1997) support this result because this research study indicate a

negative association, which is not in consensus with agency theory as generally recognized.

Furthermore, size found to be positively associated with firm performance.

Gleason et.al. (2000) investigate the association between performance and leverage by ROA. The

findings show that debt has a negative and significant impact on performance. Research by Lara and

Mesquita (2003) indicate that long-term debt has negative sign while a short-term debt has a positive

sign. It also recommended that short-term debt is exercise among the most effective firms; short-term

debt easily rises from financial organizations. Sipahioglu and Philips (2004) investigate the

association between capital structure and firm performance and find insignificance association

between financial performance and firm debt level. This result is inverse with earlier research was

done by Miller and Modigliani (1963) in which they illustrates that debt does not directed to higher

returns and performance as indicated in information asymmetric theory, but could recently devote to

low performance as indicated in agency theory. This investigation recommended that the

organizations that have a lower level of debt perform better than firms have a high level of debt. Abor

(2005) investigate the 22 firms listed in the Ghana results indicates that short-term debt has positive

and statistically significant in association with return on equity. Short term debt is less costly than

long term debt as results show positive and significant but increase in long term debt decrease

organization profitability. While for total debt the result shows positive association, increase in debt

level will lead increase in profitability. The result also shows positive association for both sales

growth and firm size. These findings support the James and Hadlock (2002) where more debt use by

profitable firms. However, Carpentier (2006) findings shows no significance correlation between

change in debt and change in value. Only size and profitability found significant which are positively

associated with change in value in each variable. While assets growth is not significant to change in

value. Abor (2007) initiate a negative association between all the dimensions of the capital structure

and organization performance in the study of Ghana.

In study sample of South African organizations found short term debt statistically significant and have

a positive impact with return on assets it illustrate that short term debt is implied to be comparatively

less costly, increasing short run funds is due to low interest rate and in return get high profit. The

result shows negative association for long term and total debt. Because long term debt charges higher,

cost and gets low returns. These findings support the Abor (2005) study. Furthermore, study found

positive significant for size and a negative result for sales growth on return on assets (ROA) (Abor,

2007). Raheman (2007) conducted a study of 94 corporate firms listed in Islamabad Stock Exchange




(ISE) Regression and Pearson’s correlation analysis find the relationship of capital structure with

firms profitability, after evaluating financial statements of the firms it is proved that capital structure

has impact firm profitability. Malekian, Lotfollahpour & Bagheri (2012) analyze the 400 firms from

12 sectors listed in Tehran Stock Exchange (TSE); the study indicates that positive association among

capital structure and firm performance. Priya and Nirajini (2013) used data from trading firms listed

in Sri Lanka Stock Exchange (SLSE) from the year 2006 to 2010 and used multiple regression and

correlation analysis and the result indicates a significant association between capital structure and firm

performance. Impact of capital structure on financial institutions first analyzed by Berger (2006)

results show a positive association between capital ratio and earnings ratio of the bank. Campello

(2007); Psillaki and Margaritis (2007); found that if a firm increased debt level and firm’s assets are

more tangible than the firm’s performance will also increase as compared to the market rivals. Tang,

Jang and Chen (2008) investigated that firm value increases if a firm used only debt for financing

activities.

According to Liu and Cheng (2010) if the leverage of a firm is balanced the capital structure will be

positively related to firm performance. Morogie and Erah (2010); and Champion (2010); also support

Margariti and Psillaki (2007); by finding that capital structure positively related to firm performance.

Chowdhury (2010) study investigate 77 listed firms on Chittagong and Dhaka Stock Exchange, results

provide a positive and strong correlation among capital structure and organization performance. Firm

performance and capital structure is positively related to each other. Shoaib (2011). Badriyah and

Ismail (2011) examined the Malaysian listed banks the results indicate a positive association between

leverage and profitability, assets and firm growth also found positive association with each other.

Capital structure positively related to the firm profitability means if capital structure increases the

profitability of a firm will also increase, Aman (2011). Jang and Park (2013) found a positive

association among capital structure and firm profitability after the analysis of 308 firm data from

1995-2008 efficient use of debt reduce cash flow and increase firm performance. Song and Huang

(2006) study investigate Chinese firms results indicates a negative association between capital

structure and firm performance. Leverage is negatively relation to performance. Ghosh (2007).

Hameed et.al (2007) investigates Oman firms study found a firm performance is negatively and

significantly related to capital structure decision.

Madan (2007) examine the importance of capital structure decision with the whole performance of

corporate firms. Study found that a few firms positively affected by leverage and the rest of all

corporations effect negatively. Tian and Zeitun (2007) analyze the firm’s capital structure through

return on assets and return on equity results indicates significant and positive impact on firm

performance the results support the previous work done by Myers (1997) that firm STD to TA have a

high growth and performance. The size of firm found a positive effect on performance large size firm

has low level of bankruptcy costs. Ebaid (2009) results indicates total debt and short term debt

negatively effect on organization financial performance measure through return on assets. In addition,

measure through return on equity (ROE) capital structure has no effect on banks performance. The

result for return on equity (ROE) is same with Mahmoodi and Saeedi (2011) but not for the return on

assets (ROA) who found it is associated with short term debt, long term debt and total debt. Thornton

and Molyneux (1992) first to discover the determinants of banks profitability, they study sample

consist of 18 Countries for the period of (1986-1989). The study found a positive and significant

relation between the return on equity and interest rate, government ownership and concentration ratio

in each country. Mendes and Abreu (2002) examine the determinants of banks interest and

profitability for European countries. The study found that banks the lower bankruptcy cost because of

their size and providing different type of product and services that translate better performance and




profitability. While a negative significant in all regressions models. The study also find inflation rate

and unemployment is relevant to the bank’s profitability. Bergr (2006) examine the financial

institutions found a positive association among earning of banks and capital structure decision. In

1997, DeYoung test the banks efficiency and indicate that there is a positive association among

efficiency, quality of loan and bank capital. Banks are highly levered as compared to non-financial

institutions; banks are influenced by debt in the same way as other non-financial institutions,

(Flannery, 1994).

The major function of a bank is to make loans; financial institution is highly levered than others.

Muller (2008). Banks functional approach to capital structure proposed by Rajan and Diamond (2000)

suggest that banks capital structure determinants should by be modeling the important function of

banks performance. Ismail and Pratomo (2006) investigate the agency cost theory on Malaysian banks

and found that lower equity ratio leads to high-profit efficiency Shoaib and Siddiqui (2011) agreed

with Ismail (2006) who done their study on Pakistani banks As applies case in Indonesian Banks. The

study aims to test the profitability indicators and performance of Islamic bank in Indonesia, where the

survey found that investment funds that do not include benefits have no effect on the profitability of

banks. (Izhar & Asutaya, 2007). Saeed (2013) investigate impact of capital structure on the

performance banks, which took five years from 2007 to 2011 to be examine, performance measure

through return on equity, return on assets and earnings per share. While the elements of the capital

structure include long term debt, short term debt and total debt to capital ratio. Results show positive

association between elements of capital structure and performance of banks. Bashir (2000) investigate

the elements of Islamic bank’s financial performance across 8 different countries for the time period

of (1993-1998). Many of the capital structure determinants were used to predict the Islamic banks

efficiency and profitability. The study took the Taxation, Macroeconomics environment and Financial

Markets situation as control variables. The study results show that loans to total assets, leverage lead

to a higher level of profitability.

Hassan and Bashir (2004) results show that the Capital assets ratio is performing better in Islamic

banks as compare to conventional banks that show well capitalization of Islamic banks. These results

further support by (Iqbal, 2001 & 2004) the study also conclude that Depositors of conventional banks

are safer than Islamic banks depositors because the rate of return is fixed in conventional banks as

compare to Islamic banks return where it is not fixed that why depositors demand more rate of return.

More favorable ratio as per international standard in Islamic banks is Profit ratio. The study also

reports that international banks are more profitable as compare to national Islamic banks. Association

of taxation with banks profitability found negative and macroeconomics and stock market

improvement have a positive effect on Islamic banks profitability. In order to accomplish the goals of

the financing of any company, it must be a funding process suited in harmony with company goals,

through the identification of the optimum mix of financing, the capital structure which will lead to the

extreme possible value, valuable source of funding include a mix of debt and equity, will finance

projects through debt commitment and responsibility which results in an effect on cash flows,

regardless of the success of the project, as earlier research study done by Khalid and Zaher (2014).

Test the consequence of capital structure on the performance of Jordanian Islamic Banks in which

they use several financial ratios as independent variables (Total Assets Ratio, Ratio of Financing,

Liquidity ratio, Equity ratio and bank concentration ratio) while the performance took as dependent

variable that is measured by Scale Tobin Q (market value of bank), the study found a positive effect

for each ratio only concentration ratio has a negative effect while liquidity ratio has no effect on

Performance. A firm’s performance effect by debt maturity and capital structure choice debt maturity

effects a firm’s investment options. In addition, the tax rate is anticipated to have an impact on




organization performance. Therefore, examine the impact of capital structure elements on a firm’s

performance will provide indication of the effect of capital structure on organization performance

(Zeitun, 2007).

2.1 Hypothesis of the study

H1: There is no Impact of capital structure on the performance of Islamic banks in Pakistan.

Debt to Assets Return on Equity

Figure 1: Conceptual Framework of the Study


The study populations consist of all Islamic banks in Pakistan but some banks operate with both

Islamic and conventional banking practices. Therefore, only five pure and classified Islamic banks

were selected for investigation. Nature of data is secondary. And collected from the State bank of

Pakistan annually Publication and Annual reports of the particular Islamic banks.

3.1 Variables of the study

3.1.1. Dependent variable

To measure the performance used return on equity as proxy. It is calculated through net income

divided by shareholders equity. Return on equity show how a firm use shareholders equity to generate

profit.

3.1.2. Independent Variable

a. Debt to Total Assets

Ratio of debt to total assets and debt is supposed to have a positive impact on the profitability of the

banks (Khalid & Zaheer, 2014).

b. SIZE

Is the control variable and represent the bank size, to measure the size study take the natural logarithm

of the size of the Bank's assets, larger-sized banks mostly take advantage of their large size to acquire

the cost savings which increase the profit of those banks (Goaied & Naceur, 2001).

c. Assets Growth

Growth assets are intended to grow bank investment. Such as shares, different investments and

property, and tend carry higher level of risk, however have the potential to deliver higher returns over

longer investment time frames.

Islamic Banks

Performance

Capital

Structure

Assets Growth & Size




Table 1: Abbreviation and Measurement of Variables

Variables Abbreviation Measurement

Return on Equity ROE Net Income / Shareholders’ equity

Debt to Total Assets DTA Total Debt / Total Assets

Assets Growth AG

Assets current Year - assets previous

year / Assets current Year

Firm Size SIZE Ln ( Total Assets )

Research Model

Multiple regression model is used:

ROEit = β0+β1DTAit + β2SIZEit + β3AG +µit

Where:

ROEit is return on equity of bank i at time t.

DTAit is capital structure ratio of bank i at time t.

SIZEit is size of bank i at time t.

AGit is asset growth of bank i at time t.

µit is error term.

4. Results and Discussion

Table 4.1: Regression Analysis

Variable Coefficient Std. Error t-Statistic Prob.

Constant -2.349 0.317 -7.417 0.000

DTA 0.132 0.124 1.067 0.001

SIZE 0.091 0.014 6.375 0.000

AG -0.007 0.088 -0.078 0.938

Adj-R-Square 68.3%

Coefficient of DTA is positive and statistically significant at level of 1%. Therefore, the Null

Hypothesis has been rejected. Moreover, t-value is less than 2 that show a weak impact of DTA on

ROE which means that each 0.1% increase in Debt will increase 13.2% of profit for Islamic banks.

The results support the study of (Abor (2005); Aman (2011); Jang and Park (2013); Khalid and Zaheer

(2014); Myers (1997); Priya and Nirajini (2013); Zeitun and Tian (2007). However, the results are

different from the stud studies of (Ebaid (2009) and Sipahioglu and Philips (2004). The results further

indicate that the coefficient of size is positive and statistically significant at the level of 1%, that show

a strong impact of size on Islamic banks performance. The result of size variable support the study

results of (Abor (2005); Gleason et.al. (2000); Khalid and Zaheer (2014); Raheman et.al, (2007);

Saeed et.al. (2013). Assets Growth find negative and statistically insignificant at a level of 1%, results




of AG support previous studies conducted by of (Abor, 2007); Haseeb and Arif (2013); Saeed et.al.

(2013). R² implies that 68.3% of the variation in performance (ROE) can be explained by the model

variables.

5. Conclusion

In this research study researchers investigate the impact of capital structure on Islamic banks

performance during 2008-2014. Used multiple regression models for analysis. From the results of the

study found that Debt to Assets and size have positive and significance impact on Islamic banks

performance, however, Assets Growth is negatively and insignificantly related with Islamic banks

performance.

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Khan, Rehman & Khan 77 ISSN: 2520-0739

Determinants of Foreign Direct Investment in Pakistan: A Comparative Analysis in

Democratic and Non-Democratic Eras

YASIR KHAN PhD-Scholar Qurtuba University Peshawar

[email protected]

ALAM REHMAN NUML Peshawar

[email protected]

FARMAN ULLAH KHAN

NUML Peshawar

[email protected]

Abstract

The chief objective of this research is to investigate empirically the determinants which affect Foreign

Direct Investment (FDI) inflow in Democratic and non-Democratic eras of Pakistan by using yearly

data from 1980 -2014. In this research, six independent variables have been taken along with Dummy

which are Gross Domestic Product, Interest Rate, Trade Openness, Inflation Rate, Exchange rate,

Dummy variable and one dependant variable which is Foreign Direct Investment. For econometric

analysis, annual time series data were collected from the Pakistan Bureau of Statistics, UNCTAD,

World Development Indicator (various issues), International Financial Statistics, Global Economy

and Economic Survey of Pakistan. This thesis applied advanced econometric methodology which

comprises unit root testing and Johansen co-integration analysis. The Vector Error Correction Model

(VECM) was employed to identify both the long-run and short run relationship between FDI and its

determinants. The dummy variable captured the difference as there is a significant difference between

the determinants of Foreign direct investment in Democratic and Non-Democratic eras of Pakistan.

Keyword: Foreign Direct Investment, Democratic and Non Democratic, Interest rate, Inflation rate

1. Introduction

We are living in a global village; the distance has been compressed because of high speed

transportation and efficient communication system. A person can move from a country to another

country just in few hours and can deliver his message from a corner to another corner of the world just

in few seconds. In the same way, business can move from one area to another area without any delay

of time. The one of the best example of business movements is foreign direct investment (FDI).

According to Gilpin R (2002), FDI is defined as when a country wants to set up economic enterprises

within the jurisdiction of other countries and or want to expand the existing business in the

jurisdiction of another nation. Since long time, a significant shift has been felt in the attitude towards

Foreign Direct Investment which is flowing to developing nations. Specially, the discussion among

academics and policy makers has shifted from whether foreign direct investment should be

encouraged to how developing nations can attract Foreign direct investment. Definitely, various

world-wide development organizations like World Bank, ponder FDI to be one of the most active






instruments in the world which is a source to eradicate poverty, and consequently which promote

poor nations to make rules with a view to improve FDI flows. But, several of these countries having

weak democracies or nondemocratic governments that want to promote FDI. Thus it is important to

know the influence of democracy and non-democracy on FDI. Like, if democracy discourages FDI,

then countries face a trade-off between increased democratization and promoting more FDI. Although

there is not available any evidence of clear theory regarding the impact of democracy on FDI, but FDI

may be influenced by democratic institutions positively influence because there are strong checks and

balances of democratic government on elected officials, and this leads to decrease arbitrary

government interference and becomes stronger the property right protection (Norht & Weingast, 1989;

Li, 2009).

According to Li and Resnick (2003) also, the multinational firms may give preference to invest in a

non-democratic country rather than in democratic countries. The fact is that non-democratic regimes

are not answerable to their electorates like non-democratic eras. Consequently, non-democratic regime

may be in a well position to give larger incentive packages and also give protection from labour

unions. As military governments have a small electorate, the executive branch gives less preference to

the large public’s concern like welfare, wages and working conditions in their economic decision-

making without facing any electoral costs as long as it benefits the elites making up their winning

coalition (Linz, 2000; Bueno de Mesquita et al, 2002; 2005). Democratic governments prevailing in a

country are domestically answerable for policy outcomes and may consequently be liable to local,

populist pressure of both voters and local companies that may result to policy instability and investor

uncertainty (De Mesquita and Root, 2000; Jensen, 2012). Therefore, dictatorships may be preferred by

certain overseas investors as they provide high level of future certainty regarding drivers which gives

benefits in investigating the returns of investment decisions (Donnell, 1988). Thus, numerous

researchers recommend that non-democratic governments provide better incentives for investment

than democratic ones (Bornschier & Chase-Dunn, 1985; Oneal & Oneal, 1988; Haggard, 1990; Oneal,

1994; Greider, 1998).


Pakistani economy faces low foreign and domestic investment due to low domestic savings, high non-

productive consumption and slow economic growth. Foreign direct investment determined through

many economic variables in the economy. These variables are of micro and macro level in their effect.

The GDP, interest rate, Exchange rate, inflation and trade openness are main economic variables

which determined foreign direct investment in Pakistan. It was examined that in Pakistan, Foreign

direct investment was maximum in the previous periods but after 2008, decrease in the Foreign direct

investment of Pakistan has been examined. This study is conducted to investigate the Determinants of

Foreign Direct Investment in Pakistan, a comparative analysis in Democratic and Non-democratic

eras. This study has investigated the determinants which affect the FDI inflows and its positive or

negative influence on FDI. With a view to boost the future amount of investment in Pakistan by

foreign countries, this study is examined to measure foreign exchange rate, inflation, market size or

GDP, interest rate, and trade openness in the stated two distinct period of rules. Understanding the

amount of FDI inflow during Democratic and non-democratic eras is always a challenge for the

economists, managers and researchers.





What are the Determinants which are considered most important for fall and rise of FDI in

Democratic and Non-democratic eras of Pakistan?

What is the impact of these factors on FDI in Democratic and Non-democratic eras of

Pakistan?

1.3 Research objectives

The goal of this study is to explore factors of FDI which are considered most important for fall and

rise of FDI inflow in Democratic and Non-Democratic eras of Pakistan.

To Examine and investigate the impact of different factors on FDI inflow in Pakistan.

To compare the effects of the factors which affect FDI inflow towards Pakistan during

Democratic and Non-Democratic eras.

To suggest measure to improve these factors to encourage FDI inflow towards Pakistan

1.4 Significance of the Study

Pakistan is a large investor of local and foreign capital. Pakistan is receiving a large quantity of

foreign direct investment from all over the globe. These foreign direct investments affect individual,

households as well as the entire economy. This research enhances the knowledge of users like

economists, Policy maker etc. on the determinants of Foreign Direct Investment (FDI), thus the

research gives highlight on the determinants on FDI in both Democratic and Non-democratic eras of

Pakistan.


2.1 Foreign Direct Investment

Foreign Direct Investment is a significant component in international economic integration. FDI

produces constant and long ending connections amongst different economies and leads to the

dispersion of technology and sustainable development. The firms have an excellent spot for the

development of their products at international level (Glass, 2002). FDI can be defined in many ways.

FDI is defined by OECD (2014) as the investment which is made by a foreign investor in one

economy with a view to get the lasting interest in a company resident in another nation. The final

benefit becomes later a long term relation amongst the direct investor and the company and direct

investor has the strong impact on the management of the enterprise. Besides, according to the standard

of company rules, it will be important for direct investor to have 10 % ordinary or voting. Foreign

direct investment is affected by many factors in a host nation. Numerous researches have examined

the factors of inbound FDI related to multiple economies. A brief review of the literature will be

discussed as follow which is related to the choice of variables involved in this research. The

availability of huge literature on FDI presents an evidence that with the increase in globalization raise

the significance of Foreign direct investment in economic growth and development.

2.2 Impact of FDI on Economic Growth

A study employed by Li and Liu (2005) on the impact of Foreign direct investment on economic

growth and examined that the Foreign Direct Investment plays a huge part in improving of economic

growth. They presented that Foreign Direct Investment has a positive and significant association with

economic growth. Another research was performed by De Meelo (1999) and examined that there is a




positive relation between Foreign Direct Investment and economic growth in both developing and

developed nations. Der et al (2004) examined that there is a causality association running from

Foreign Direct Investment to economic growth.

2.3 Determinants of FDI

The multiple factors which affect FDI were explored, in the initial research it was recommended the

investor companies should select the countries with the low cost, high labor force and developing

nations were chosen for the investment but after the study conducted by the Mundell (1957) tends to

elaborate that different determinants like trade barriers, rich and poor nations at capital base and

geographical distribution of investment recommend that the countries with low gross domestic

product, wage etc. are not only the targeted nations. With the lapse of period, the researchers found

different determinants which encourage and affect the investors they want to do investment in the host

nation. The determinants which were identified are market size, economic stability, labour market,

geographical and cultural indicators and found that these are the variables which used to study the

FDI.

2.4 Exchange Rate and FDI

Exchange rate is a key factor of Foreign direct investment. A research was employed by Cavallari and

Addona (2013) on determinant of US Foreign direct investment in 46 economies. They executed

regression analysis using the period of 1982-2009 and concluded two main results that US FDI has

positive association with host country. The association between Foreign direct investment and

exchange rate is more robust in boom as compared to recession and the second result was a Positive

association of FDI with exchange rate volatility.

2.5 Inflation and FDI

Inflation is considered a significant sign of economic stability. This is investigated by numerous

researchers like Demirhan and Masca (2008) that lower inflation showed the stable economy and it

provides a room for the growth of the economy. The country having stable economy can attract the

many investors from abroad because there exists a stable economy and have room for the expansion

of the business and to extend their activities. These arguments were extracted from results of

regression models which indicates that inflation has negative and significant association with FDI. A

research was employed by Demirhan and Massca (2008) in thirty-eight developing countries by using

panel data ranging from 2000 to 2004 and found that the inflation having negative sign was

statistically a significant driver of Foreign direct investment.

2.6 Interest Rate and FDI

Shehzad and Zahid (2011) employed study in Pakistan in order to examine economic indicators which

influence Foreign direct investment. The time period of the research was from 1991 to 2010. They

indicated that there was positive association between Foreign direct investment and interest rate which

has been supported by New trade theory which explain that those firms which enter into the market as

new comers becomes a leading company because of the advantage of economies of scale that declines

the prices and in turn rises the interest rate.

2.7 Trade Openness and FDI

Numerous researches were employed by Charkrabati (2001), Blonigen and Piger (2011) and




examined that there is a positive trading relation between domestic and foreign countries with Foreign

direct investment. Those nations having open trade can bring more Foreign direct investment. It was

examined by (Blonigen & Piger, 2011). The trade openness as factor of Foreign direct investment.

They investigated from the findings of the study that trade openness is significantly related to FDI.

The research employed a Bayesian model averaging approach which and in order to attract FDI, the

minimal support for the government policies is revealed.

2.8 Market size (GDP) and FDI

Ibrahim and Hassan (2013) employed a study in which they examined that GDP, inflation rate,

exchange rate, indirect taxes and trade openness are factors of foreign direct investment in Sudan.

They used the time span ranging from 1970-2010. They employed co-integration approach to inspect

the long run relation..They implemented Dickey Fuller test for the stationarity while co-integration

test and error correction model were executed for finding of the long run and short run association.

2.9 Foreign Investment inflows in Pakistan

Presently, in Pakistan Net FDI for the period of FY 2016-17 is $US112.6 Million which is according

to the Pakistan Board of Investment. With a view to analyse the FDI conditions in Pakistan across the

years and in form of percentage of GDP, the table below presents the picture. The table presents a

brief view of the FDI flowing to Pakistan, their composition, the major participants of FDI in

Pakistan. This table indicates the net inflow of FDI into Pakistan between the time span from 2007 to

2016.

Figure 1: Conceptual Framework

2.10 Hypothesis

H0: There is no significant difference between the Determinants of FDI in Democratic and non-Democratic

eras. H1: There is significant difference between the Determinants of FDI in Democratic and non-Democratic

eras.

3. Data and Methodology

This study performed a quantitative research method, as it is mostly based on gathering and analyzing

quantitative data (Bryman, 2001) with well-defined model to explore the relationship between

quantitative properties and phenomena. For such type of study, there are two main types which are

often performed are quantitative method and qualitative approach. The researchers employ both or

one or both together according to their research to achieve the desired objective. This study has used

quantitative research methods to perform this research (Flick, 2006).

FDI




3.1 Population and Sampling

The sample size is 32 years starting from 1980 to 2014.

Total population is 69 years, starting from 1947 to 2016

3.2 Data Collection and Methods

This study inspect the determinants of Foreign Direct Investment in two Democratic and Non-

democratic eras means 1980 to 1988 with 1989 to 1997 and 2001 to 2007 with 2008 to 2014.Time

series data can be defined as a group of observations on the values where a variable takes different

times which is in chronological sequence. Data were taken from the International Financial Statistics,

Economic Survey of Pakistan (various issues), Global Economy, Pakistan Bureau of Statistics,

UNCTAD, World Investment Report (various issues), World Development Indicator (various issues)

and Pakistan Board of Investment. The data for variables as GDP, Inflation, Trade Openness,

Exchange rate and FDI are obtained from the World Development Indicators of the World Bank while

data of Interest rate was gathered from International Financial Statistics (IFS).

3.3 Statistical tools, Techniques and Models

The Vector Error Correction Model (VECM) was executed to analyse various factors in short and long

run which have influence on FDI inflows into Pakistan during Democratic and Non-Democratic eras.

3.4 Model Specification

Foreign investors do investment in foreign countries in order to receive maximum return. Based on

the time series data, the impact of the five explanatory variables (gross domestic product, exchange

rate, inflation, interest rate and trade openness) on the dependent variable foreign direct investment in

democratic and non-democratic eras is investigated and a research or equation model is constructed,

which is based on the time series data analysis model. The research or equation model for this study is

as follows:

Y(FDI)= α + β1(ER)+β 2(CPI)+β3(IR)+β4(TO)+β5(GDP)+ β6(Dummy)+ ε

Where

FDI= Foreign Direct Investment

ER = Exchange Rate

CPI=Consumer Price Index

IR= Interest Rate

TO= Trade Openness

GDP=Gross Domestic Product

Dummy= 1 for non-democratic era or 0 otherwise

3.5 Vector Error Correction Model (VECM)

3.5.1 Error Correction Model (VECM) Results

Despite that the long-run equilibrium that has been verified using the Johansen Co-Integration Test,

there could still be short-run disequilibrium among economic relationships as the case of most

variables which theorized to be dependent of each other’s behaviour. The VECM is used and is




employed to obtain the short run as well as long period relationship amongst variables, it has the

features that if the current state is deviate from its long run position than such deviation will fed into

short run periods. With the Vector Error Correction Model (VECM) the disequilibrium of one period

is adjusted in the next period, hence it is a way to settle the long run and short run dynamics for given

time span.

3.5.2 Diagnostic Checks

The following are the diagnostic tests.

LM Test

Lagrange-multiplier test

+--------------------------------------+

| lag | chi2 df Prob> chi2|

|------+-------------------------------|

| 1 | 42.8120 36 0.20197 |

| 2 | 35.3731 36 0.49822 |

+--------------------------------------+

H0: no autocorrelation at lag order

3.6 Test for Autocorrelations in residual of the model

The null hypothesis in Lagrange-multiplier test states that there is no autocorrelation in the error terms

of the equations. In the above table 4.5, the p-values obtained in the LM test for Autocorrelation are

0.20197 and 0.49822 which means that the said hypothesis is accepted. The Lagrange multiplier test

reported no problem of heteroscedasticity or autocorrelation.

Vec FDI REER TO CPI GDP IR , trend(constant) rank(4) lags(3) si(DM)

Vector error-correction model

Sample: 1983 - 2013 No. of obs = 31

AIC = 22.68565

Log likelihood = -235.6276 HQIC = 24.4348

Det(Sigma_ml) = .16114 SBIC = 28.05154

Equation Parms RMSE R-sq chi2 P>chi2

----------------------------------------------------------------

D_FDI 18 .241178 0.9035 112.342 0.0000

D_REER 18 5.88454 0.7915 45.55982 0.0003

D_TO 18 1.95971 0.6868 26.31595 0.0928

D_CPI 18 2.79415 0.6873 26.38023 0.0914

D_GDP 18 1.40611 0.7949 46.51968 0.0002

D_IR 18 2.76199 0.6309 20.51081 0.3048

----------------------------------------------------------------




4. Findings

The Vector Error Correction Model clearly indicates that there is a significant positive correlation

between real effective exchange rate and foreign direct investment. So, the research examined that

Exchange rate has positive significant association with Foreign direct investment as the sign of

exchange rate is positive suggesting that as the rupee increases, Foreign direct investment also raises

as investors consider that it shows a good sign for the economy and assume more returns.

5. Conclusion

Pakistan is a well-known country of the world on account of its geographical location. Over thousand

kilometer of coastline with Arabian Sea made it a gate way to trade with Central Asia, Middle East

and other markets of the world. Being close to Afghanistan, Iran, China and India which increase its

strategic value. Investing abroad is a big decision because it is riskier to do investment in a foreign

country without analyzing the environment of that country. So, where the Investors decide to make

investment see whether which type of government is being governed there. Democracy and Non-

Democracy are two well-known types of government being practiced in Pakistan. Rotterdam (2008),

Democracy gives rise to a stable policy environment. A stable policy atmosphere is very important for

foreign investors in the FDI-decision. The research investigated the FDI determinants i.e. exchange

rate, inflation, interest rate, trade openness and Gross Domestic Product as explanatory variables and

Foreign direct investment as dependent variable. The data was collected for the period 1980 to 2014.

5.1 Recommendations

Government should take care of political instability, law and order situation and the increased

violence a part from these better investment policies and friendly environment is also important to win

the investors’ confidence. Improving the macroeconomic environment in the country is important to

catch the attention of investors; there is a great need of healthy economy and stable exchange rate,

reduce inflation and provide hospitable environment to investors.

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Pengurusan, 28(1), 3-22



Ahmad, Ilyas, Khan & Khan 86 ISSN: 2520-0739

Factors Influencing Individual Investors’ Behavior: An Empirical Study of Pakistan

Financial Markets

SHAFIQ AHMAD

Lecturer, Abdul Wali Khan University, Mardan [email protected]

MUHAMMAD ILYAS Lecturer, Abdul Wali Khan University, Mardan

PhD-Scholar, Abdul Wali Khan University, Mardan

[email protected]

MUHAMMAD KHAN Lecturer, Abdul Wali Khan University, Mardan

MUHAMMAD TAHIR KHAN Lecturer, Abdul Wali Khan University, Mardan

[email protected]

Abstract

The study examines the factors influencing individual investor's behavior in Pakistan's financial

market. The paper is based on a modified questionnaire administered to 102 investors and their

response was measured for five groups of thirty variables. The groups are accounting information,

firm image/self-image coincidence, neutral information, advocate recommendations and personal

financial needs. The most influencing factors in terms of order are expected corporate earnings,

dividends paid, stock marketability, condition of financial statements, expected dividends, current

economic indicators, past performance of the firm stock, broker recommendations, firm status in

industry and get rich quick. The least influencing factors by order are religious reasons, political

party affiliation, environmental record, perceived ethics of the firm and family member opinions. Two

factors are such that they unexpectedly have least influence on the Pakistani investor’s behavior that

is religious reasons and family member opinions. One factor that is broker recommendation is

unexpectedly highly influence Pakistani investors behavior in making their investment decision.

Keywords: Investor’s Behavior, Financial Market, corporate earnings, stock marketability

1. Introduction

Research in behavioral finance is comparatively new. In behavioral finance it is believed that

information system and the features associated with market contributors systematically impact

individual’s investment decisions and also market outcomes. According to (Seweel, 2007) the study of

the influence of psychology on the behavior of financial practitioners and the subsequent influence on

markets is called behavioral finance. Behavioral finance assists and describes the reasons why and

how markets might be inefficient. According to behavioral finance, investor market behavior derives

from psychological guidelines of making decisions to describe why people purchase or sell the stocks.

Behavioral finance concentrates on how investors understand and address information for making

investment decisions. Furthermore the behavioral finance focuses on investor behavior leading to

different market concerns.







According to (Shefrin, 2001) in traditional financial concepts, investors are assumed to be much more

concerned about wealth maximization, following basic financial guidelines and making financial

strategies purely on the risk return analysis. On the other hand in practice the degree of risk investors

are willing to undertake is not really the same and relies largely on their personal perceptions toward

risk. A good understanding of behavioral processes and outcomes is significant for financial planners

simply because an understanding of how investors normally react to market movements should assist

investment analysts in creating proper resource allocation approaches for their clients. Furthermore

individual investors like to evaluate organizations on the basis of their reputation. In recent analyses,

corporation status is investigated as a determinant in the formation of risk and return anticipations.

Investors usually tend to assume that effective investment opportunities come from good corporations,

that is from organizations with a great reputational status.

According to Reza (2011) Conventional financial theories have normally captured two important

assumptions to choose different stocks by financial decision makers. In the first place, investors make

rational decisions through following basic financial principles base on their investment approaches

and risk-return consideration and next they are unbiased in their estimations about upcoming earnings

of the stock. However the nature of investor’s decisions is not exactly the same and relies largely on

their personal perceptions to several characters of the stocks. Studies in behavioral finance has rapidly

expanded during the current years and given facts that investors financial decisions relies significantly

on internal and external behavioral elements. Recognition of the impacting elements on investor’s

behavior can be useful for various policyholders so that it would impact company’s future plans and

practices from company’s point of view. Furthermore it can impact the necessary regulations and the

additional operations required in order to meet investor’s desires as well as provide more help to

market effectiveness.

1.1 Purpose of the study

To determine the factors that influence individual investor behavior in the Pakistani financial

markets.


Al-tamimi (2005) In his paper has investigated factors that influencing on the UAE investor behavior

in Dubai Financial Market and Abu Dhabi Securities Market by using a set of 34 questions. He has

divided the questions in five groups. Six elements have been discovered the most influencing elements

whereas more than fifty percent of overall participants consider these kinds of elements as the most

influencing elements on their behavior. The most influencing element was by arrangement regarding

significance are expected corporate income, get rich fast, stock marketability, previous

performance associated with the firm’s stock, governing administration holdings, the development

of the structured financial marketplace. Five elements have been identified to have the very least

influencing elements where less than 10% of overall participants consider these elements as the

minimum influencing elements on their behavior. The least influencing element was by order

regarding significance are anticipated losses in other local investments, decreasing risk, anticipated

losses inside foreign financial marketplaces, family member viewpoints as well as gut feeling for the

overall economy. Chong (2011) this research is about the individual investor behavior in Malaysian

stock markets. The study investigated two main classes (neutral and accounting information) which

include many factors. The outcome shows that neutral information is considerable positively related

while accounting information is negatively related to anticipated return. Female investors have a




higher significance in employing social relevance elements compared to male investors in their

investment decision. With regards to stock market experience, there is a substantial distinction

between stock market experiences of the participants in using accounting information to assist their

investment decisions. It is observed that investors with stock market experience of 5 to 10 years and

15 to 20 years are highly employing accounting information in supporting their investment decisions.

Moreover, it is described that investors with more than 20 years of stock market experience are less

likely to employ accounting information in their investment decision.

Merikas (2003) followed a modified set of questions to investigate elements having an influence on

Greek investor behavior on the Athens Stock Exchange. The outcomes shows that individuals base

their stock purchase selections on economic conditions combined with different other factors. They do

not depend on just one integrated approach, instead on many categories of factors. The outcomes also

states that there is a specific level of correlation regarding the elements that behavioral finance theory

and former empirical proof determine as the influencing elements for the average equity investor and

the individual behavior associated with dynamic investors in the Athens Stock Exchange (ASE)

influenced by the total trends prevailing during the time of the survey in the ASE. This investigation

analyzed the elements that seem to exercise the greatest effect on the individual stock investor and

incorporated not only the elements researched by prior research and produced by current behavior

financial theories but also presented further elements produced via personal interviews which have

been observed to influence the stockholders investment selections in Greece. Obenberger (1994)

analyzed elements having an influence on investor behavior. They formulated a list of questions to

investigate the elements having an influence on individual investor behavior. Their studies indicated

that classical wealth-maximization criteria are very important to investors even though investors use

different criteria when choosing stocks. Contemporary concerns like regional or global operations,

environmental track record and the firm’s moral posture seem to be given only basic consideration. The

recommendations of brokerage house, individual stock brokers, and family members and fellow

workers go typically unheeded. Several individual investors discounted the advantages of valuation

models when analyzing stocks.

Akhtar (2012) shows that majority of individual investors indicate solid preference for cash dividend.

Outcomes also show that most of individual investors take important portion of their dividend income

and also few investors reinvest their dividend income. Investigation of various dividend theories

explains that majority of shareholders have solid preference for cash dividend. In case the corporation

does not have sufficient cash to pay cash dividend, investors still have solid desire to get stock

dividend. They also indicate powerful desire for cash or stock dividend even if corporation has to give

dividend by borrowing cash. Chandra (2011) paper principal components analysis is carried out by the

data collected from survey of sample individual investors to extract the factors influencing Indian

individual investor behavior in stock market. Especially the psychological bias which may drive their

trading behavior was identified. To fulfill this objective the questionnaire technique was used. The

results reveal some psychological axes such as conservatism and under confidence which are

consistent with the prior literature to some extent but there are some contrary behavioral axes reported

by the multivariate analysis such as prudence and precautious attitude and informational asymmetry

which are not yet considered in prior literature in growing economies, particularly in Indian context.

Kadiyala (2002) investigated the investor response to corporate event announcements. They

determined that investors seem to under react to previous information and facts as well as to

information and facts provided by the event leading towards the diverse patterns: returning

continuations and also return reveals both documented in long-horizon return. They determined no

assistance for the overreaction hypothesis. Hodge (2003) examined investors' perceptions of earnings




quality, auditor independence, and the efficiency of audited financial information. He figured lower

perceptions of earnings quality are connected with greater reliability on a firm’s audited financial

arguments and essential evaluation of those arguments when making investment decisions. Krishnan

(2002) tested the elements having an influence on the choices of investor who use analysts’

recommendations to reach a short-term selection to carry or to sell a stock. The outcomes point out that

a solid way of the analyst summary recommendation report, i.e., one along with further details

supporting the analyst’s situation further minimizes the disposition error for profits and also minimizes

the disposition error for losses.

Epstein (1994) analyzed the demand for social information by individual investors. The outcomes

suggest the efficiency of yearly reports to corporate investors. The outcomes also show a strong

demand for facts about product safety and quality, and about the company's environmental

activities. Barnea (2010) analyzed two essential financial decisions that the majority of individual

investors in developed countries experience. First the decision to invest in the stock market and then

selection of asset allocation. The outcome shows that an individual's genetic composition is a crucial

determinant of the individuals’ investment behavior. While more facts show that nature is an

important determinant of an individual's investment behavior. Furthermore they point out that the non-

shared environment tends to be considerably more significant than the shared environment in

describing the cross-sectional difference in investment behaviors. The family environment does have

vital effects on the investment behavior of young individuals but this influence is not long-lasting

because individual gains personal experiences as time passes. Maditinos (2007) show that the

majority of Greek investors depend heavily on fundamental and technical analysis and less on

portfolio analysis. Surprisingly the combined use of both fundamental and technical analyses is

reasonably popular among all user categories. There are variations across time horizons however

using fundamental analysis being viewed as the most significant method in the long-term but

technical analysis being key in the short-term. Portfolio analysis brings in a greater reputation in the

long-term however ranks in last placement. These results are pretty reasonable and don't diverge from

theory and former investigation results.

Zhu (2002) investigate individual investors’ tendency towards regional organizations in their local

equity investment. Different measurements indicate that individual investors show considerable bias

towards organizations that are near to their houses. Investors having foreign securities show

substantially weakened regional tendency than those not having foreign securities. Furthermore the

result indicates that international home tendency and local home tendency are related. Results in this

research demonstrate that investor behavior differs considerably across investor classes which inspire

future analysis on the influence of investor patrons about asset rates. Owen (2008) investigate the

relationship between socially responsible investing and individual investor behavior. The evidence

shows that demographic features along with non-financial motives play a significant part as investors

decide whether or not to take into account socially responsible investing products. Particularly, the

results declare that female investors those who actively take part in religious groups and those who

take into account the societal impact of their purchases as consumers are more likely to consider the

societal components of the companies they invest in. Thus the result shows that social responsibility

of an organization have a positively effects on individual investors behavior. Reza (2011) investigates

small investor’s behavior to acquire stock in the Kuala-Lumpur stock market. They divided the factors

in 13 main classes for stock selection empirically determined by using the literature evidence.

Essential aspect get noticed by small investors via five sub-variables of profit and loss statement,

balance sheet, corporate financial statement reports, cash flow statement, audit report statement and

the economic variables are significantly less essential aspect is identified by one sub-variable which is




market value added. In addition, the research explained by literature shows that the institution and

individual investors take into account three variables of calculating the risk of stock, government

policies and economic variables as impacting aspects on stock choice but these three variables has

been reducibly put on by small investors.

Gelos (2002) examined the relationship between transparency of a country and individual investor

behavior. The result indicates that investor prefers to hold more assets in more transparent markets

and that herding among funds is somewhat less prevalent in more transparent countries. Thus more

transparent markets positively effects on investor behavior while less transparent markets negatively

effects on investor behavior. The result also finds out assistance from the view that during the Asian

and Russian crises the global investors tended to leave less transparent countries.


The fundamental goal of the study is to examine the factors that influencing individual investor’s

behavior in the Pakistan financial market. For this purpose questionnaire method was used to receive

responses from different investors. Two hundred questionnaires were distributed to investors in the two

stock exchanges of Pakistan, namely Karachi stock exchange and Islamabad stock exchange. A

response of 120 was received which became 60% of the total. Out of 120 responses 18 responses were

incomplete, the inclusion of which add noise to the sample therefore they were excluded. The

remaining 102 full responses were considered to be enough for the study.

3.1 Types of Data

Two types of data is used for the study, these are

3.1.1 Primary Data

Primary data is collected by conducting a modified questionnaire to 102 investors from the two stock

exchanges of Pakistan i.e. Karachi stock exchange and Islamabad stock exchange. The primary data

collected is the core element of the study.

3.1.2 Secondary Data

Secondary data is collected from scholarly articles, journals, books and different websites like

hubpages.com, kse.com and ise.com etc. The secondary data helped to understand the different facets

of the subject and identify the key variables for the study.

3.2 Questionnaire

This paper formulated a modified questionnaire to evaluate the behavior of the Pakistani investors.

Saunders (2009) state that questionnaire is the chief data collection tool; it is significant that essential

questions related to the study must be used to get the appropriate result. In order to extract the correct

required information from the respondent, correct terminology must be used. The list of questions

represent five different categories, namely self-image/firm-image coincidence, accounting information,

neutral information, advocate recommendation and personal financial needs. Based on this

questionnaire, the most significant item and the most significant category were determined. The

developed questionnaire consists of thirty items where nine items correspond to self-image/firm-

image coincidence category, seven items correspond to accounting information category, six items




correspond to neutral information category, four items to advocate recommendation and four items

to personal financial needs. Participants were asked to indicate their degree of agreement by marking

only one of three choices for each of the 30 variables: “High Influence” for the variables which were

significant in making their investment decisions, “Low Influence” for the variables of secondary

importance in their decision making, and “No Influence” for the variables that were not at all

significant in their investment decision process. The factors were ranked according to how frequently

they were placed in each response category and factor analysis was used to evaluate how they

interacted with one another. More specifically, factor analysis was used to identify the resemblances

among the variables and group them into identifiable categories.

3.3 Model Specification

Cronbach's Alpha is used to analyze the reliability of variables. Chi square test is used to find out the

significant level association between the variables. Descriptive statistic is used to find the mean and

standard deviation of the five groups. Frequency distribution is used to find the extent of influence of

these 30 variables on the investor’s behavior of Pakistan financial market.

4 Results and Discussions

4.1 Reliability of the measures

Reliability of the measures was assessed with the help of Cronbach’s alpha. Cronbach's alpha is

considered the most popular way of measuring internal consistency (reliability). It is most frequently

used if you have multiple Likert questions in a survey/questionnaire that form a scale and you desire

to see whether the scale is reliable or not. Cronbach’s alpha enables us to estimate the reliability of the

various groups. It consists of estimates of how much dispersion in scores of various variables is

attributable to chance or random errors. As a general principle a coefficient more than or equal to 0.5 is

regarded acceptable and also a good sign of constructive reliability. The overall Cronbach’s alpha for

the five categories is (0.993). The Cronach's alpha for the five categories namely accounting

information, self-image/ firm-image coincidence, neutral information, advocate recommendation and

personal financial needs is following. (0.970) for the group 1, (0.976) for the group 2, (0.962) for the

group3, (0.928) for the group 4 and (0.937) for the group 5 respectively. Cronbach’s alpha indicates

that these categories are reliable.

Table 4.1: Accounting Information * Firm Image/Self Image Coincidence

Chi-square test is one of the simplest and most widely used statistical tests. More specifically the chi-

square test statistic can be used to evaluate whether there is an association between two variables or

not. Here the purpose of the chi square testis to determine association between all the variables under

study.

Hypothesis Test:

Ho: There is no association between accounting information and firm image/self-image coincidence.

H1: There is an association between accounting information and firm image/self-image coincidence.

Chi-Square Tests

Value df Asymp. Sig. (2-

sided)

Pearson Chi-Square 68.440a 4 .000




The P value for these two variables is less then (.05) therefore we reject the null hypothesis which

means that there is a strong association between these variables.

Table 4.2: Accounting Information *Neutral Information Chi-Square Tests

Value df Asymp. Sig. (2-sided)


Hypothesis Test:

Ho: There is no association between accounting information and neutral information.

H1: There is an association between accounting information and neutral information.



Table 4.3: Accounting Information *Advocate Recommendation

Chi-Square Tests

Value Df Asymp. Sig. (2-sided)


Hypothesis Test:

Ho: There is no association between accounting information and advocate recommendation.

H1: There is an association between accounting information and advocate recommendation.



Table 4.4: Accounting Information *Personal Financial Needs Chi-Square Tests



Hypothesis Test:

Ho: There is no association between accounting information and personal financial needs.

H1: There is an association between accounting information and personal financial needs.



Table 4.5: Firm Image/Self Image Coincidence* Neutral Information Chi-Square Tests



Hypothesis Test:

Ho: There is no association between firm image/self-image coincidence and neutral information.




H1: There is an association between firm image/self-image coincidence and neutral information.



Table 4.6: Firm Image/Self Image Coincidence*Advocate Recommendation Chi-Square Tests



Hypothesis Test:

Ho: There is no association between firm image/self-image coincidence and advocate

recommendation.

H1: There is an association between firm image/self-image coincidence and advocate

recommendation.



Table 4.7: Firm Image/Self Image Coincidence* Personal Financial Needs Chi-Square Tests



Hypothesis Test:

Ho: There is no association between firm image/self-image coincidence and personal financial needs.

H1: There is an association between firm image/self-image coincidence and personal financial needs.



Table 4.8: Neutral Information*Advocate Recommendation Chi-Square Tests



Hypothesis Test:

Ho: There is no association between neutral information and advocate recommendation.

H1: There is an association between neutral information and advocate recommendation.






Table 4.9: Neutral Information* Personal Financial Needs Chi-Square Test



Hypothesis Test:

Ho: There is no association between neutral information and personal financial needs.

H1: There is an association between neutral information and personal financial needs.



Table 4.10: Advocate Recommendation* Personal Financial Needs Chi-Square Test



Hypothesis Test:

Ho: There is no association between advocate recommendation and personal financial needs.

H1: There is an association between advocate recommendation and personal financial needs.



From the entire above hypothesis the P value is less then (.05) for all the variables. So it is concluded

that there is significant association between all these variables.

Results

This section includes the three tables and their analysis. The table 1 shows mean and standard

deviation for all the five groups namely accounting information, firm image/self-image, neutral

information, advocate recommendation and personal financial needs. In table 2 variables that seem to

exercise the most influence on the behavior of Pakistani investors are analyzed. Table 2 rates the

factors by frequencies with which participants viewed them to have significant influence on their

investment decisions in the Pakistani financial market. The table 3 shows the analysis of variables that

seem to exercise the least influence on the behavior of Pakistani investors in making their investment

decision. Table 3 rates the factors by frequencies with which participants viewed them to have least/no

influence on their investment decisions in the Pakistan's financial market. Mean and Standard

deviation of all the five groups that influencing Pakistani investors behavior




Table 4.11: Accounting Information 1. Stock Marketability

2. Expected corporate earnings

3. Condition of financial statements

4. Dividends paid

5. Affordable share price

6. Expected Dividends

7. Past performance of the firm’s stock

Mean 9.84

Standard deviation 3.72

2. Firm Image/self-Image

8. Religious Reasons

9. Feelings for a firm’s products and services

10. Reputation of the firm’s shareholders

11. Get rich quick

12. Firm status in industry

13. Political party affiliation

14. Perceived ethics of firm

15. Gut feeling on the economy

16. Increase of the firm’s involvement in solving community problems

Mean 16.94


3.Neutral Information

17. Information obtained from the internet

18. Fluctuation/developments in the stock index

19. Coverage in the press

20. Statements from politicians & governmental officials

21. Current economic indicators

22. Environmental record

Mean 10.79




Mean is useful in situations where various population groups are adding to an overall average and you

want to give more influence to one group or the other depending on a certain criteria. While standard

deviation used for measuring variability to compute the spread of the data as well as the relationship

of the mean to the remaining data. If the standard deviation closes to the mean representing that the

variance is small. In that case the standard deviation will be small. On the other hand if the standard

deviation far from the mean it means that there is a wide variance in the responses. In that case the

standard deviation will be large. Here the result shows that all the 30 variables included in

questionnaire are somehow affecting the decisions of Pakistani investors. The most importance group

by order of impotence as firm image/self-image coincidence, neutral information, accounting

information, personal financial needs and advocate information. The effect of each factor of the 30

factors will be analyzed in the following tables.


4.Advocate Recommendation

23. Broker recommendation

24.Family member opinions

25. Friends and coworker r 25.Friend or co-worker recommendations

26. Opinions of the firm’s majority stockholders

Mean 7.55


5.Personal Financial Needs

27. Attractiveness of non-stock investment

28. Diversification needs

29. Ease of obtaining borrowed funds

30 Minimizing risk.

Mean 7.79





Table 4.12: Frequency distribution of variables that significantly/highly influence on the

behavior of Pakistani investors.

Number Item Frequency Percent

1. Expected corporate earnings 78 76.47%

2. Dividends paid 74 72.54%

3. Stock Marketability 70 68.62%

4. Condition of financial statements 67 65.68%

5. Expected Dividends 65 63.72

6. Current economic indicators 60 58.82%

7. Past performance of the firm’s stock 57 55.88%

8. Broker recommendation 57 55.88%

9. Firm status in industry 54 52.94%

10. Get rich quick 52 50%

11. Affordable share price 49 48.03%

12. Reputation of the firm’s shareholders 48 47.05%

13. Fluctuation/developments in the stock index 46 45.09%

14. Minimizing risk 45 44.11%

15. Feelings for a firm’s products and services 41 40.19%

16. Gut feeling on the economy 39 38.23%

17. Information obtained from the internet 37 36.27%

18. Statements from politicians & governmental officials 35 34.31%

19. Coverage in the press 35 34.31%

20. Increase of the firm’s involvement in solving

community problems

30 29.41%

21. Opinions of the firm’s majority stockholders 29 28.43%

22. Ease of obtaining borrowed funds 26 25.49%

23. Friend or co-worker recommendations 23 22.54%

24. Diversification needs 21 20.58%

25. Religious Reasons 20 19.60%

26. Political party affiliation 17 16.67%

27. Perceived ethics of firm 15 14.7%

28. Environmental record 12 11.76%

29. Family member opinions 12 11.76%

30. Attractiveness of non-stock investment 9 8.82%

The Table 4.12 shows the data categorized according to all those variables that have the most influence

on the Pakistani investor behavior. The first ten factors are those where more than 50% of the total

respondent considered these factors are the most influencing factors on their investment decision. In

the first ten factors which highly affect the Pakistani investors, six factors belong to accounting

information. These factors are expected corporate earnings, dividends paid, stock marketability,

condition of financial statements, expected dividends and past performance of the firm. All of these

factors shows the relative importance of wealth maximization criteria and confirmed that wealth

maximization is the most important criteria for investors. All of these factors significantly affected the

behavior of Pakistani investors. For example one of these factors is stock marketability in which

investors are more interested. This would affect the policies that to be followed by companies listed in




the three stock exchanges. In order to increase their stock marketability, these companies need to

review frequently the relationship between the price and demand on their stocks. If the stock price is

too high, this might make it difficult to sell and one of the policies can be adopted by companies to

make it more marketable as a stock split Others four factors are current economic indicators, broker

recommendation, firm status in industry and get rich quick. The first factor belongs to neutral

information, the second to advocate recommendation and the third & fourth to firm image/ self-image

respectively. Broker recommendation is a factor in these factors which highly effects on the Pakistani

investor. The investors are given more weightage to the broker’s advice than on family members and

friends/coworker advices. The reason is that the investors believe that broker have much more accurate

information related to stock investment opportunities.

Some factors have unexpectedly least influence on the Pakistani investor’s behavior. For example

religious reasons factor in which 20 respondents or 19.6% of total response considers this factor as the

most influencing factor on the behavior of Pakistani investors. Religious reasons factor was expected to

be considered by a large number of respondents as the most influencing factor on their investment

decision. This is mainly because mostly the Pakistani investors don’t like to invest their money in the

conventional banks in order to avoid adding interest on their investment which is forbidden from

an Islamic point of view. The other unexpected responses were those related to family member

opinions, in which only12 respondents or about 11.7% of total responses consider this factor as

the most influencing factor on the behavior of Pakistani investors. Regarding the five groups of factors

which influencing the behavior of Pakistani investors the most influencing factors belongs to

accounting information group, namely expected corporate earnings, dividends paid, stock

marketability, condition of financial statements, expected dividends and past performance of the firm's

stock. The second group is firm image/self-image coincidence group in which important factors are get

rich quick, firm status in industry, reputation of the firm shareholders and feelings for a firm products

& services. The third group is neutral information group in which important factors are current

economic indicators, fluctuation/development in the stock index and information obtained from the

internet. The fourth group is advocate recommendation group in which important factors are broker

recommendation and opinions of the firm majority shareholders. The fifth and last group is personal

financial needs group in which minimizing risk is the important factor.




Table 4.13: Frequency distribution of variables' that least/no influence on the behavior

of Pakistani investors.

Number Item Frequency Percent

1. Religious Reasons 40 39.21%

2. Political party affiliation 37 36.27%

3. Environmental record 34 33.33%

4. Perceived ethics of firm 33 32.35%

5. Family member opinions 31 30.39%

6. Increase of the firm’s involvement in solving

community problems

26 25.49%

7. Attractiveness of non-stock investment 26 25.49%

8. Feelings for a firm’s products and services 23 22.54%

9. Ease of obtaining borrowed funds 22 21.56%

10. Diversification needs 21 20.58%

11. Coverage in the press 20 19.60%

12. Opinions of the firm’s majority stockholders 19 18.62%

13. Friend or co-worker recommendations 17 16.67%

14. Statements from politicians & governmental officials 17 16.67%

15. Reputation of the firm’s shareholders 15 14.7%

16. Gut feeling on the economy 14 13.72%

17. Information obtained from the internet 14 13.72%

18. Get rich quick 13 12.74%

19. Minimizing risk 11 10.78%

20. Fluctuation/developments in the stock index 10 9.8%

21. Affordable share price 10 9.8%

22. Broker recommendation 8 7.84%

23. Past performance of the firm’s stock 7 6.86%

24. Current economic indicators 7 6.86%

25. Firm status in industry 6 5.88%

26. Dividends paid 5 4.9%

27. Stock Marketability 4 3.92%

28. Condition of financial statements 3 2.94%

29. Expected corporate earnings 3 2.94%

30. Expected Dividends 3 2.94%

The Table 4.13 shows the data categorized according to all those variables that have the least influence

on the Pakistani investor behavior. The first five factors are those where more than 30% of the total

respondent considered these factors are the least influencing factors on their investment decision. These

factors are religious reasons, political party affiliation, environmental record, perceived ethics of the

firm and family member opinions. Out of these five factors the first, second and fourth factor belong to

firm image/self-image group, the third one belongs to neutral information group while the fifth and last




one belongs to advocate recommendation group. The first factor is religious reasons factor in which 40

respondents or 39.2% of total response consider this factor as the least influencing factor on the

behavior of Pakistani investors. As already mentioned that this as an unexpected response received

from investors. The second factor is political party affiliation factor in which 37 respondents or 36.27%

of total response considers this factor as the least influencing factor on the behavior of Pakistani

investors. This is also an unexpected response because in Pakistan many of the politicians have their

own businesses and they have strong influence on the laws & regulations regarding to tax, borrowing

and other related matters.

The next least influencing factor is environmental record. Unfortunately in Pakistan most of the

investors ignore this factor in making their investment decision. In developed countries companies

spend a lot of money to keep the environment safe & sound otherwise they will be enforced by law. In

Pakistan most of the companies don't follow government regulation due to bad governance. The same

situation is for the perceived ethics of the firm in which most of the investors are unaware of the

importance of this factor. Another least influencing factor is family member’s opinions in which 31

respondents or 30.4% of total response consider this factor as the least influencing factor on the

behavior of Pakistani investors. Only 11.7% investors give weightage to their family member opinions

in making their investment decisions because of education level and experience in the relevant field.

Regarding the five groups of factors which least influencing the behavior of Pakistani investors, the

first least influencing group is firm image/self-image, the second group is personal financial needs, the

third group is neutral information, followed by advocate recommendation and the last group is

accounting information.

5 Conclusion

In this study the factors which influencing the behavior of Pakistani investors was examined. The

paper contains a modified questionnaire which included thirty questions. These thirty questions

belong to five groups namely accounting information, firm image/self-image coincidence, neutral

information, advocate recommendation and personal financial needs. Seven items belongs to the first

group, nine items to the second group, six items to the third group, and four items each to fourth and

fifth group respectively. Ten factors were founded to be the most influencing factors on the behavior

of Pakistani investors in making their investment decisions. All of these ten factors were considered

important by more than fifty percent of the total respondents. The most influencing factors in order of

importance were expected corporate earnings, dividends paid, stock marketability, condition of

financial statements, expected dividends, current economic indicators, past performance of the firm

stock, broker recommendations, firm status in industry and get rich quick. On the other hand five

factors were founded to be the least influencing factors on the behavior of Pakistani investors in

making their investment decisions. The least influencing factors in order of importance were religious

reasons, political party affiliation, environmental record, perceived ethics of the firm and family

member opinions. Two factors were founded to be unexpectedly least influence on the behavior of

Pakistani investors namely the religious beliefs and family member opinions. While on the other side

broker recommendations factor was found unexpectedly the most influencing on the behavior of

Pakistani investors in making their investment decisions. Regarding the five groups of factors which

influence the behavior of Pakistani investors, the most influencing factors were belongs to accounting

information group, namely expected corporate earnings, dividends paid, stock marketability, condition

of financial statements, expected dividends and past performance of the firm's stock. The second group

was firm image/self-image coincidence group, in which important factors are get rich quick, firm status




in industry, reputation of the firm shareholders and feelings for a firm products & services. The third

group was neutral information group, in which important factors are current economic indicators,

fluctuation/development in the stock index and information obtained from the internet. The fourth

group was advocate recommendation group, in which important factors were broker recommendation

and opinions of the firm majority shareholders. The fifth and last group was personal financial needs

group, in which minimizing risk was the important factor.

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