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Journal of Business and Tourism Volume 02 Number 01
January – June, 2016
The Effect of Liquidity and Capital Structure on Organization

Performance: Evidence from Banking Sector
YASIR KHAN
Ph.D Scholar, Qurtuba University Peshawar
[email protected]
DR. SAIMA BATOOL

Assistant Professor, Qurtuba University Peshawar
[email protected]
DR. MUHAMMAD ASAD KHAN

NUML Peshawar Campus
[email protected]
MUHAMMAD IDRIS
Assistant Professor, Department of Education
Abdul Wali Khan University, Mardan
[email protected]
Abstract
This study title as Effect of liquidity and capital structure on Financial Performance:
Evidence from Banking Sector. This study investigates Effect of liquidity and capital
structure on Financial Performance in banking sector. The study was conducted using 10
banks as a sample out of 64 banks in the Pakistan. The results were obtained using
correlation and step wise regression to know the direction, association and impact of
variables and the effects of liquidity and capital structure on performance. The result
found that liquidity and capital structure affects the performance positively in banking
sector. Therefore it is suggested that banks should exercise such practice. All the
hypotheses developed for this study has been achieved through the analysis of this
research study.
Key words: Liquidity, Capital Structure, Organization Performance, Schedule

Banks in Pakistan.
1. Introduction
Liquidity is a measure of the extent to which a person or organization has cash to
meet immediate and short term obligation, or asset that can be quickly converted to do
this. Whereas, capital structure is indicator of how profitable a company is relative to its
total assets. Return on investment gives an idea as to how efficient management is at
using its assets to generate earnings. Calculated by dividing a company's annual earnings
by its total assets, Return on assets is displayed as a percentage. Sometimes this is
referred to as "return on investment”. The capital of the firm is as “those pool of funds
Khan, Batool, Khan & Idrees 137 ISSN: 2520-0739
that the company commits to its fixed assets, to inventories, to account receivables, and
to cash or marketable securities” which lead to corporate growth. capital are important in
any business development for well capital structured a business firm must select best
plan for various ways of selecting the best components of the capital and that is used in
the operation of a company to raise its productivity and to achieve performance. The
whole process should be based on criteria which are well drawn by the finance manager
after the financial planning for the company (Uremadu, 2004). An economist considers
capital as any material that is consumed for the production to make wealth. Hence capital
can be said as factors of production the factor of production are basically divided in
money, man, and machinery and the forth one is information (Efobi, 2009). The ability of
a firm to choose sources of capital for its operations is a difference between a good
managed capital structure and a poorly managed capital structure. Liquidity is important
for company existence. This has effect on financial costs changes, changes in the sales
dynamic and it influence on risk level of that company. According to Kesimli & Gunay
(2011), liquidity is refer to the relation of investment in current Assets and current
liabilities that are converted within the year as well as paid within the year concern so
that very imported as concerned with daily operation.
The relation of working capital and Liquidity is very close, the generation of
revenue is depended on working capital and working capital is relatively connected with
liquidity. They further added working capital management importance that working
capital management is extremely very important and today the success and failure of any
firm can be determined through it. They further added that working capital management
directly effect on firm’s profitability. Filbeck& Krueger (2005), argued that by managing
the component of the working capital business can get high rate of success. Some of the
researchers like Almajali et al, (2012), Liargovas& Skandalis, (2008), also support the
same positive effect of the working capital management on the financial performance of
the firms, they added that some of firms may implement aggressive policy while other
use conservative working capital management policy to achieve the firms overall goals.
In developing countries much of the studies have been so far conducted to analyzed the
result of working capital management on financial performance of the firms, In Kenya a
number of studies have been done on this issue in non financial listed companies at the
Nairobi Securities Exchange as a result to get how liquidity affects the financial
performance. Effect of liquidity on management of an organization is very attractive and
exciting although very subtle in measurement of financial performance.
1.1 Problem Statement
Liquidity and capital structure refers to the ability of the business to meet its cash
obligations within a specific time period. Capital structure, profitability and liquidity are
related concepts, but by no means are they equivalent. Unlike profit, cash flow includes
loan principal payments, proceeds from liquidated assets and family living expenses.
Cash flow does not include profitability factors such as depreciation, the value of
inventory changes, or capital gains and losses. Liquidity is best measured with cash flow
statements or budgets. When firms have problems with liquidity they may defer their
payments to creditors which is a harmful for companies and can result in several
consequences such as worse credit terms in the future. This in the long run adversely
affects profitability. According to the KSE (2010), a number of public and private
companies have been under statutory management in the last decade due to liquidity
issues.
1.2 Objectives of the Study
 To analyze and describe the pattern of liquidity and capital structure practices in
banking sector for the period of 2005-2014
 To investigate the effect of capital structure and liquidity on financial
performance of the firm.
 To suggest measures to improve the mechanism and framework for liquidity and
capital structure in banking sector.
2. Literature Review
Capital structure means that firm finances their assets through combination of
equity, debt and hybrid securities. Let’s imagine a perfect capital market where there is no
transaction or bankruptcy costs and perfect system of information and importantly firms
and individuals can borrow at the same interest rate with no taxes due to which
investment decisions are not affected by financing decisions. Two findings Modigliani
and Miller found in the stated circumstances. The value of the firm is in depended to
capital structure this is the first preposition. The leveraged firm and the cost of equity is
equal as it’s for the cost of equity for an unleveraged firm and with it premium of risk is
also associated. Which is like if the leverage increases, so then the burden of individual
risks is shifted in different classes of investor so total risk is conserved and no extra value
created? Capital structure is also defined as the various option of financing of the asset
with a firm. Rahemen, Zulfiquar and Mustafa (2007) argued that a concern with business
go to the multiple mixture of debt and equity which have emphasis on maximizing the
market value of a firm because Capital structure directly relation with the liquidity and
profitability of a firm.
The conclusive significance of liquidity means that for company development it
is very important and at the same time it is one of the important factors which responsible
for company market position. Liquidity is vital for a firm existence. It mostly has an
effect on financial costs reduction or growth. The consequence of liquidity to a firm
performance guided to a conclusion that it settle profit level of firm. The essential issue to
financial manager is to find out the suitable mix between equity and debt to a firm. The
mix of debt and equity called as firm’s capital structure. A financial manager struggles to
attain best capital structure for firms which increase the market value of the firm and also
assure satisfactory liquidity (Uremadu, 2009).
Capital adequacy refers to the sufficient amount of banks equity to absorb any
shock that a bank may experience (Ong & Teh, 2013). The use of debt has impact on
firm’s The total capital of a company or a firm is “a stock of money, possessed by a
person or a business firm, that could be invested, from time to time, in order to earn
income, but for which it is intended not to diminish”. Akinsulire (2002) an economist
considers capital as any material that is consumed for the production to make wealth.
They are said as factors of production which are divided into man, machine and money
and information the fourth division (Efobi, 2009). Efobi (2009) also added about the
capital structure and the liquidity of the firms after analyzing the Ghana Stock exchange
during 2000 to 2010 and found that they are highly geared. This effect is because of
the attributed to their over dependency on short term debt as a result relatively high Bank
of Ghana Lending rate and low level of bond market activities and there is a negative
relationship between gearing and the banks performance (Awunyo & Badi, 2012).
According to (Uremadu 2004) that the capital is the pool of fund or it is a bunk
availability to purchase an asset or group of assets for running of a business routine work
as well as the overall business. An indicator of how profitable a company is relative to its
total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. Calculated by dividing a company's annual earnings by its total assets,
ROA is displayed as a percentage. Sometimes this is referred to as "return on investment"
(Uremadu, 2004). Clarke (2004) argued about the capital structure and liquidity in his
study “cycle of crises and regulations” that the inefficient working capital structure lead
to failure and crises for an organization which definitely highly impact on the return i-e
return on assets and return on equity. The capital structure need keen attention of the
policy maker due attention should be given at the time of making any strategies. The
mangers of an organization are the agent of the shareholder in an organization and they
are working on behalf of the share holders they are trying to increase the wealth of the
share holders. Mangers are the experience people and having the relevant skill and
knowledge to handle each and every critical situation. A corporation with liquid stocks
can increase its stock price (Diamond and Verrecchia, 1981; Holmström and Tirole,
1993), offer more motivations for insiders to create worth (Faure-Grimaud and Gromb,
2004), and boost shareholder interference (Kyle and Vila; 1991; Kahn and Winton, 1998;
Maug, 1998; Noe, 2002). Maug (1998) offer a theoretical framework to display that
liquid stock markets to control the difficulties, support active corporate governance.
Fang, Noe, and Tice (2009) offer empirical proof that liquidity is increase the stock value
because liquidity encourages trades by up-to-date investors and results in more
explanatory stock prices and improved managerial motivations. However, Fang, et al.
(2009) do not find solid proof to support that liquidity develops active governance and
monitoring. The realistic relation between a corporation’s stock liquidity and
performance, mostly the corporate governance effects of stock liquidity.
Claessens (2002) described that liquidity play very vital role in the firm
significances toward profitability and potential to meet their operational expenditure.
Every organization strives to keep the profitable track for their organization. Profitable
transaction need to keep liquid amount that is cash for making their operational payments
and to avail the benefits of cost reduction. It also increase stakeholder trust as well as
increase value of share holder wealth. The corporation is failed in stock liquidity due to
the absence of solid proof on the corporate governance effects: (i) the significance of
corporation and industry is determined corporate governance arrangements and
shareholder worth (Johnson, Moorman & Sorescu, 2009; Larcker, Ormazabal & Taylor,
2011); (ii) Monitoring the industry Backgrounds which show the relation among stock
liquidity and governance (Brockman and Chung, 2003; Chung, 2006); and (iii) stock
liquidity can be improved by corporate governess (Holmström & Tirole, 1993; Maug,
1998).
2.1 Theoretical Review

2.1.1 Liquidity Management Theory
2.1.1.1. Commercial Loan Theory
Adam Smith developed this theory in England during the 18th century.
According to Adam smith, a profitable bank must offer small period liquidating advances
to meet working capital desires. The bank should stop long period’s advances. Profitable
bank deposits are basically advances and should have short term self-liquidating
liabilities. The bank should follow a principle which is called Real Bill Doctrine,
according to Real bill doctrine as and when bank lent money on self-liquidating papers
the new loan should not be granted until the previous loan repaid. The doctrine criticized
on some of reason that in Economic depression goods cannot be moved easily into a
normal channel of trade so the prices fall and falling in price it become losses to sellers.
The genuine transaction for which the loan granted the debtor will not be able to repay
the loan. The next criticism was that the bank can only ensure their liquidity of its assets
when it readily convertible into cash without loss. That’s why the commercial loan theory
was failed to become in practice.
2.1.1.2. Shiftable Theory
The pioneer of this theory was Moulton establish the theory in USA in 1918, in
the stable theory it is indicated that the issue of liquidity is not an issue but moving of
assets with no material misfortune. Moulton indicated “to attain minimum reserves,
relying on maturing bills is not needed but maintaining quantity of assets which can be
shifted to other banks whenever necessary. It must fulfill the attributes of immediate
transferability to others without loss. In case of general liquidity crisis, bank should
maintain liquidity by possessing assets which can be shifted to the Central Bank”.
2.1.1.3. Liability Management Theory
Anglo-Saxon during 1970s indicated the liability management theory that
financial institutions interest rates turned out to be progressively unpredictable. This is
one of the imperative liquidity management theories. The liability management theory
holds that banks can meet their liquidity prerequisites by offering in the business sector
for extra supports to take care of advance demand and deposit withdrawal. There is no
compulsion to follow old liquidity norm like keeping up fluid resources or fluid
speculations. As indicated by the liability management theory, an individual bank may
require reserve from diverse sources by making extra liabilities against it. These sources
contain various things like issuance of time certificate of deposit, acquiring credit from
other commercial banks; borrowings from the Central Bank, issuing so as to raise capital
fund offers shares and by method of retain earning.
2.1.1.4. Financial Performance Determinants
There are many factors as internal and external which affect the performance of
firms (Al-Tamimi, 2010; Aburime, 2005). Many factor influence financial performance
of a company. Some of them are specifically connected with firm while other are
connected to market. Though, the senior managers are responsible to evaluate the risks
and take appropriate actions for securing the company’s financial position. The required
cash availability to trade with supplies and customer must be ensured. The some of the
factors which effects on the financial performance of the banking firms are Liquidity,
inflation rates, corporate governance practices, distribution networks, growth of informal
sector, management information systems and product diversity among others.
2.1.1.5. Liquidity
The ratio analysis are used to indomitable the Liquidity position of a firm.
Current ratio, quick ratio and operating cash flow ratio (Operating Cash Flow Ratio =
Operating Cash Flow / Current Liabilities) are used to assess the liquidity measurement.
Gosh (2009) stated that concern on ration analysis are being important for firms as they
need to sell inventory, they also need a customer to buy that inventory. For measuring the
company's liquidity operating cash flow ratio are used. The result if become less than 1
will definitely indicate that the company for payment of short term liabilities has not
much enough cash which may signal the managers to give attention on acquiring the
capital. That’s why many investors and analysts prefer higher operating cash flow ratios.
For time being in the case of company is in the positing for launching the second
manufacturing plant at that time the low operating cash flow ratios is not bad thing.
2.1.1.6. Inflation Rates
There is presently a generous group of confirmation demonstrating that high rates
of inflation can have adverse effects on the financial performance of an organization. A
growing theoretical literature describes mechanisms depicts components whereby even
unsurprising increments in the rate of inflation effects on the performance at all.
Particularly, recent theory underline the significance of informative asymmetries in credit
market and show how increments in the rate of inflation unfavorably influence credit
market grindings for negative repercussions for financial sector specially banks (Huybens
& Smith 1998, 1999). Because of inflation the cost of products increases and hence the
net revenues decrease, decreasing the financial performance of the organization.
2.1.1.7. Corporate Governance Practices
Corporate governance alludes to the way in which an organization is coordinated,
managed, and controlled. Corporate governance also concerns the connections among the
different internal and outside stack holders included and in addition the governance
procedures intended to help a company accomplish its objectives. Prime significance is
those systems and controls that are intended to eliminate agency problem the problem of
agent “Manager” and principle “shareholder” (Kent & Ronald, 2010). Corporate
governance guarantees transparency and credibility which improves firm performance.
The stakeholders are benefited through corporate governance practices. It helps how to
govern the organization to achieve the assign goal. Corporate governance helps through
tools and concepts that eliminates agency problem- the problem between principle (share
holders) and agent (Manager) by H. Kent Baker and Ronald Anderson (2010). La Portaet
al (2000) argues that Corporate governance is a technological system which provide a
safe guard to the external stockholder from the internal stakeholder , we can say that it is
a methodology and practices through which both the internal as well as external
stockholders stake are safe and protected from each other exploitation.
2.1.1.8. Distribution Networks
According to Barthélemy (2008) argues that system's effect resources and

governance structure on the financial performance of the chain, he utilizes as
performance criteria a mix of return on sales (ROS) and return on assets (ROA). The
analyses of Perdreau et al. (2010) stated that the financial performance (ROA) coming
about because of plural structures in franchising chains. Considering the mean turnover
for every system, Chaudey and Fadairo (2010) highlight the positive impact of all the
more obliging contracts for the retailers. Madanoglu et al. (2011) investigate whether
franchising units accomplish a superior financial performance than non-franchising ones.
Sharp distribution channel helps in expanding client base and henceforth high turnover
volumes, prompting better performance for the firm.
2.1.1.9. Growth of Informal Sector
As per the International Labor Organization, the informal division basically
covers the disorderly range of monetary activity in trade, agriculture, development,
assembling, transportation and services. It ingests maximum percentage of the work
power in urban territories of developing nations. This essentially incorporates the bit of a
nation's economy that lies outside of any formal regulatory environment. No strong
approach found about how firms consider the decision to formalize their status and
whether they are acting in a rational way to maintaining a strategic approach from the
cost of having a place with the formal part. De Mel and McKenzie (2013) intended to
reveal insight into this inquiry, especially from the firm profitability point of view.
2.1.1.10. Product Diversity
Rumelt's (1974) spearheading study indicates that the relationship between
corporate diversification and firm performance has pulled in more consideration than
some other area of strategic management research. The past research has given more
attention on associating profitability differentials with distinctive diversification
strategies. Rumelt (1974) set the pattern for developing so as to result examination
scientific categorization of enhancement methods. He found that related diversification
was connected with a higher profitability than was unrelated diversification and that then
the narrow focused related constrain was more productive than the looser related-
connected diversification.
2.1.1.11. Empirical Review
This research is conducted to investigate the effect of liquidity and capital
structure on financial performance: evidence from banking Sector. The dependent
variable is the financial performance as measured by Return on Assets (ROA) and Return
on Equity (ROE). Liquidity as measured by current proportion and working income
proportion (Operating Cash Flow Ratio= Operating Cash Flow/Current Liabilities) are
the two principle free variables of the study.
2.1.1.12. International Evidence
A study by Cho and Kim (2007) reasoned that firm’s profitability and liquidity
are influenced by working capital management. The study utilized pooled information for
the period somewhere around 2006 and 2008 to survey the organizations recorded in the
Vietnam Stock Exchange. The study concentrated on cash conversion cycle and related
components to quantify working capital management. The study found that the
connections among these variables were emphatically negative, recommending that
benefit is contrarily affected by an increment in real cash conversion cycle. The study
also found that profitability increments as the debtor collection period and stock
conversion period decrease. The present study operationalized working capital
management as aggressiveness and conservatism as measured by the extent of current
liabilities to total assets and total liabilities.
In a study directed to focus the impact of working capital management on
profitability of Indian firms, Sharma and Kumar (2011) utilized a specimen of 263 non-
monetary firms recorded on the Bombay Stock Exchange amid 2002 to 2008.
Information was examined utilizing OLS multiple regression. They found a positive
relationship in between working capital management and firm profitability, despite the
fact that the relationship between cash conversion cycle and return on assets was not
statistically significant. The study also found that account receivables are positively
correlated to return on assets and that the account payables are negatively related to
return on assets.
(Quick ratio)
(Acid test ratio) Liquidity Firm’s financial performance
(Return on Asset)
(Debt to Equity Ratio) Capital (Return on Equity)
(Debt Ratio) Structure
(Funded Capital Ratio)
(Fund Debt Ratio)
Figure 1: Theoretical Frame Work
2.2 Hypotheses
H1: Firm liquidity has a significant effect on the financial performance of
banks.
H2: Firm capital structure has significant effect on corporate return.
3. Research Methodology
This describes the research methodology that was used to study the effect of
liquidity and capital structure on the performance. It also gives the population size, data
collection techniques and how the data was analyzed. It also talks about the data
analytical models and test of significance used in arriving at the conclusions.
1.1 Type of Research
Descriptive Research and co relational research utilizing combination of
quantitative and quantitative research approaches.
3.2 Data Collection
Secondary data for this research has been used which includes annual reports of
selected banks, data banks of state bank of Pakistan. Data collect from annual report of
the selected banks, SECP and balance sheet analysis of Joint Stock Corporation by state
bank of Pakistan. The selected data comprise on Ten year started from 2005 to 2014.
3.3 Sample Plan
As sample represent the small but proportionate representation portion of the
population being considered for the research analysis or the number of observation being
taken to conduct analysis. Random sampling technique has been used to conduct this
research study. The sample size of this research is the ten banks out of the total Sixty
seven banks in the banking sector selected through random sampling technique.
i) Khushali Bank
ii) Allied Bank
iii) Summit Bank
iv) National Bank of Pakistan
v) Habib bank
vi) Mezan Bank
vii) Bank Alfalah
viii) Standard Chartered Bank
ix) United Bank
x) Muslim Commercial bank
3.4. Data Analysis
The data analysis has been calculated by using correlation and ratio analysis test.
3.4.1. Research Models
ROA= B0 + B1D1E +B2DR +B3FCR +B4FDR +B5QR +B6CR +µ
ROE= B0 + B1D1E +B2DR +B3FCR +B4FDR +B5QR +B6CR +µ
Where
ROA stands for return on Assets, proxy for bank profitability,
ROE stands for return on Equity
D/E for Debts to equity ratio,
DR for debt ratio variables,
FCR for Funded capital ratio
FDR for Funded debt ration
QR for Quick ratio,
CR for current ratio and
µ is the error term.
4. Data Analysis
1. 2. ROA 3. ROE 4. D/E 5. DR 6. FCR 7. FDR 8. QR 9. CR
10. ROA 11. 1.000 12. 13. 14. 15. 16. 17. 18.
19. ROE 20. 0.341 21. 1.000 22. 23. 24. 25. 26. 27.
28. D/E 29. -0.121 30. -0.142 31. 1.000 32. 33. 34. 35. 36.
37. DR 38. -0.223 39. -0.261 40. 0.215 41. 1.000 42. 43. 44. 45.
46. FCR 47. -0.181 48. -0.152 49. 0.217 50. 0.078 51. 1.000 52. 53. 54.
55. FDR 56. -0.213 57. -0.245 58. 0.219 59. 0.121 60. 0.131 61. 1.000 62. 63.

64. QR 65. 0.252 66. 0.312 67. 0.071 68. 0.215 69. 0.281 70. 0.211 71. 1.000 72.
73. CR 74. 0.312 75. 0.281 76. 0.091 77. 0.181 78. 0.334 79. 0.222 80. 0.351 81. 1.0
0
Table 4.1: Correlation
The above table 4.1 shows the correlation matrix of all independent and dependent
variables. The results of the above correlation table shows that liquidity is positively
correlated with financial performance as quick ratio and current ratio shows positive
correlation with all financial proxies like return on assets , return . The level is significant
of liquidity variable
with S financial
Variables Coeffient tander t P. value
error
-
D/E 0.0245 -1.2 0.067
0.0204
-
DR 0.1366 -2.25 0.001
0.0607
-
FCR 0.4281 -1.8 0.061
0.2378
-
FDR 0.0856 -2.21 0.001
0.0387
QR 0.0899 2.52 0.001 0
performance proxies. The capital structure variables i.e. debt to equity, debt ratio, funded
capital ratio and funded debt ratio shows negative correlation with financial performance
of banks performance.
Table 4.2: Regression Analysis- MODEL 1

.0357
0
CR 0.0258 3.12 0
.0083
ROA = B0 + B1D/E + B2DR + B3FCR + B4FDR + B5QR + B6CR +µ

R.square.0.56, adjusted R.square.0.55
F. Value=16.55
The results of the above model 1 suggest that debt to equity ratio has negative
significant impact on the financial performance of banks. Debt ratio has negative
significant impact whereas funded capital ratio and funded debt ratio has negative
insignificant and negative significant impact respectively. Suggesting that an increase in
capital structure proxies will definitely affects negatively the profitability of banks in
Pakistan. The R.square0.56 suggests that almost 56% changes in dependent variable
return on equity are caused by the set of independent variable. Both proxies of liquidity
quick ratio and current ratio show positive significant relationship with the financial
performance of banks.
F. Value =16.55 means that over all model is significant.

Table 4.3: MODEL 2

Variables Co-efficient standard error T. value P. value
D/E 0.0255 -0.0181 -1.41 0.061

DR 0.1351 -0.0518 -2.61 0.001
FCR 0.4001 -0.2632 -1.52 0.071
FDR 0.0561 -0.0229 -2.45 0.001
QR 0.0511 0.0164 3.12 0
CR 0.0411 0.0146 2.81 0.001
ROE= B0 + B1D1E +B2DR +B3FCR +B4FDR +B5QR +B6CR +µ
R. Square =0.48, F. Value =12.56
The table shows that debt to equity has negative insignificant impact on the financial
performance of banks: both debt ratio and funded debt ratio has negative significant
impact whereas funded capital ratio showing insignificant impact on the financial
performance of banks. The liquidity process i.e. quick ratio and current ratio shows
positive significant impact on the financial performance of banks R. square 0.48 suggest
that almost 48% ∆has been bought by the set of independent variable s of this study. F.
values are showing significant live i.e. more than 4 mean that over all model is
significant.
4. Findings
 The result of this study find that debt to equity is negative correlated with
financial performance proxies
 The result also finds that debt ratio is significantly negative correlated with the
financial performance proxies of banks in Pakistan.
 The result find that both funded capital ratio and funded debt ratio are negative
correlated with financial performance of banks in Pakistan.
 The study result find that both proxies of liquidity i.e. quick ratio and current
ratio showing positive correlated with the banks financial performance.
 The results R.squres of different models find that all independent variables
putting impact on dependent variable (financial performance)
 The result of this study find that all four models of this study are significant
 The result finds that capital structure variable i.e. debt to equity and funded
capital ratio has insignificant impact on the financial performance.
 The result find that debt ratio and funded debt ratio proxies of capital structure
has negative significant impact on the financial performance of banks in Pakistan
 The result of this study finds that both quick ratio and current ratio have positive
significant impact on the financial performance.
4.1 Conclusion and Recommendations
This study was conducted, knowing the impact of liquidity and capital structure on
the financial performance of banks in Pakistan for the period of 2005 -2014. The
variables used in this study were firm capital structure and liquidity as independent
variable and financial performance of banks as dependent variable. The result found that
both capital structure and liquidity is very vital for the performance of banking sector in
Pakistan. The result revealed that capital structure proxies have very negative impact on
the financial performance of banks and liquidity also should positive significant impact
on the financial performance of banks. The result find that capital structure proxies
negative correlated with financial performance and liquidity positive correlated with
banks performance. The basis of results it is suggested that banks should best
combination debts and equity to maximizing the restructure and it should also look at
cash and cash equivalent resources , so as to maximizing returns and build trust and
confidence of the investors and depositors.
The past study about the corporate governance indicates that many a large
numbers of corporations become bankrupt, because of mismanagement of capital
structure. Some of researchers find that corporate failure or success depends on its
working capital management. The managers are mostly responsible for its destiny. Each
and every individual as well as institution want save investment and return therefore
every one trying to invest in profitable and sound firm. The discussion leads to many
arguments. The basic and important questions are as follows:-
1. First question which arises is that liquidity really matters in today’s corporate world?
2. What is the effect and implications of capital structure on corporate governance and
also on firm performance?
Its known certainties that in today's firms which are possessed by private investor are
profiting and are much more productive then firms operated by the public agencies. That
is private firms are more beneficial then public organizations. The above studies also
support the same statements that the private firms are more benefited comparing to public
own agencies being having efficient working capital management.
4.2 Suggestions
 As capital structure variable i.e. Debt to Equity, Debt ratio, funded credit ration,
and Funded debt ratio showing negative correlation with FP. it is suggested that
banks should reduce the level of these radios. Specifically Debt ratio and Funded
credit ration has significant negative impact which need to decrease or the banks
work and to get on optimal level of capital structure which will not affect its
Financial performance. So, the banks in Pakistan should focus on its capital
structure as it is vital for banks profitability. The best and optimal level of capital
structure will definitely has positive impact on the financial performance banks in
Pakistan. The decision makers of these banks should focus on while making capital
structure i.e. debts and equity combination as. It is very significant for smooth and
profitable operation of banks.
 Liquidity is very vital for the profitable operation and improved financial
performance of banks. It both proxies used in this study i.e. QR and CR should
positive significant impact on the financial performance of banks. On the bases of
the result it is suggested that commercial banks should more focus on its cash and
equivalent resources as it has positive impact on the financial performance and turn

a motivator for the investor move towards banks and develop trust of investors and
stakeholder towards banks and encourage deposit holders.
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Journal of Business and Tourism Volume 02 Number 01

January – June, 2016

The Effect of Liquidity and Capital Structure on Organization

DR. SAIMA BATOOL

DR. MUHAMMAD ASAD KHAN

Key words: Liquidity, Capital Structure, Organization Performance, Schedule

2.1 Theoretical Review

According to Barthélemy (2008) argues that system's effect resources and

1. 2. ROA 3. ROE 4. D/E 5. DR 6. FCR 7. FDR 8. QR 9. CR

Khan, Batool, Khan & Idrees 145 ISSN: 2520-0739

Khan, Batool, Khan & Idrees 146 ISSN: 2520-0739

ROA = B0 + B1D/E + B2DR + B3FCR + B4FDR + B5QR + B6CR +µ

Khan, Batool, Khan & Idrees 147 ISSN: 2520-0739

Table 4.3: MODEL 2

D/E 0.0255 -0.0181 -1.41 0.061

Khan, Batool, Khan & Idrees 149 ISSN: 2520-0739

Khan, Batool, Khan & Idrees 150 ISSN: 2520-0739

Khan, Batool, Khan & Idrees 151 ISSN: 2520-0739

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