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by
A thesis
Submitted in partial fulfillment of the requirements
For the degree of Master of Business Administration
To Research Facilitation Unit (RFU)
At Iqra University
Main campus, Karachi
Karachi, Pakistan
November 2019
ii
Acknowledgements
University for his relentless efforts till the completion of this thesis. Finally, I must
support, continuous encouragement; love and guidance are with me in whatever I pursue
Thank you
Ujala Habib
iii
Abstract
The main purpose of this research study is to analyze the impact of capital
in between these variables. This research study will give an insight view of the firm
This research is conducted on top 30-listed firms of Pakistan stock Exchange by using
the data from 2014 -2018 by applying hierarchal moderated regression analysis to
provide empirical evidence from Pakistan. Findings of research conclude that capital
Table of Content
1. Aknowledgements.……………………………………………. ii
2. Abstract…………………………………………………………. iii
3. List of Tables…………………………………………………… v
4. List of Figures.…………………………………………………. vi
5. Chapter 1: Introduction………………………………………… 1
1.1 Overview…….…………………………............................ 1
1.2 Problem statement……………………………………….. 1
1.3 Background, Objectives and Significance of the study….. 3
1.4 Outline of the Study……………………………………. 3
1.5 Definitions…..……………………………………………. 4
8. Chapter 4: Results……………………………………………… 14
4.1 Findings and Interpretation of the results…………………. 14
4.2 Hypotheses Assessment Summary………………………. 14
9. Chapter 5: Discussions, Conclusion, Policy Implications and 16
Future Research........................................................
5.1 Discussions.……………………………………………… 16
5.2 Conclusion …………………………...………………….. 16
5.3 Policy Implications……………..………….…………….. 17
5.4 Future Research…………………………..…………. 17
10. References……………………………………………………….. 18
v
2.
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 1
Chapter 1: Introduction
1.1 Overview
Improvement of the firm’s financial performance is the ultimately goal of any firm to
perform better not only from their competitor but also in the industry in order to capture the
market. In the growth and development of any firm, director’s commitment plays a significant
role, whether they are fulfilling what they committed in Financial report or not.
Over the last few decades, it is have been gaining more attention that how managers of the firm
make a decision about in which project should be invested to enhance profitability of firm and
wealth of shareholder. What factors should be considered in order to expand the capital. If a firm
invested in their fixed assets they, they enjoyed long-term good return from market so it would
capex and firm performance also does exist, but it could be the reason of over investment or
Many studies have been conducted in developed countries in order to evaluate the association
between the capital expenditure and firm performance, but the literature is very limited in the
context of Pakistan. This research will be giving an insight review with evidence from Pakistan
for the investors to make investment easy in the registered firm of the Pakistan Stock Exchange
through which they can take better decision and make their profit more secure from stable.
resources effectively by taking three kinds of decisions that are where to invest, how to finance
and dividend. Decision about where to invest is having more attention and interest academically.
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 2
According to the author, new investment is the lifeblood of organization .The Concept of capital
& Sharma, 2016)(Vernimmen, Quiry, Le Fur, Dallochio, & Salvi, 2017). According to Harold
Averkamp capital expenditure is investment in long life assets such as plant, property and
Few more studies have been conducted on Australian registered firms where market reaction on
announcement of the capital expenditure were examined that what impact it has on the prices of
shares of any firms.(Brailsford et al., 2017). It actually concludes that capital expenditure of any
Due to developing stage of the Pakistan, firm are able to generate growth opportunities. These
opportunities require huge investment in fixed assets. In Pakistan, most of the firms are financed
by the debt or public equity. Leverage ratio is directly affected by choice of financing of any
project. There are certain risks, which are attached with the choice of financing. Shareholder
wealth is directly affected by that choice. Fewer researches have been done to examine
the association between capital expenditure and firm performance in the educational institution
country so this research study will give in-depth insight review. This research will fill the gap
Research Question
This research study will seek the answer of following research questions
1.3.1 Background
Prior researches have proved that there is a significant relationship between capital
capital expenditure and firm performance. The leverage i.e. degree of financing the capital with
debts. As debt level will increase of the firm, higher the levered level will be. Leverage ratio can
1.3.2 Objective
This study contributes an in-depth insight of the impact of capital expenditure in order to
evaluate the firm performance and how director’s commitment moderate in between capital
expenditure and firm performance. This research will evaluate the firm performance while
controlling multiple variables just like firm size and leverage ratio.
. This study will help the investors in their decision making whether it is productive to invest in a
firm when a firm announces any kind of capital expenditure, whether directors are fulfilling their
commitment what they have committed through their annual financial report. This research will
This research study comprises of five chapters. In the first chapter, there will be overview,
then discussion of a problem statement, the objectives and significance of the study. Further, it
Second chapter deals with literature review with regarding to support my problem statement,
containing the explanation of previous researches and relevant parts or variables. This chapter
Third chapter deals with methodology of a research method of data collection undertaken,
sample size studied, sampling technique applied variables to study, and the research model.
In chapter four, the outcomes of the research will be discussed. It contains interpretation along
Fifth and the last chapter extracted from the result and future recommendation to study that what
1.5 Definition
Capital Expenditure:
The studies that linked to capital expenditure and firm performance is gained a huge
amount of interest of both academic and business arena. In developed and emerging countries,
occurs because of research and development which ultimately result the innovative production
(Rompho, 2017). Many research studies have been done academically to find out the impact of
(Rompho, 2016) found that the commitment of firm to capital expenditure has significant impact
on share price. This research study was conducted in Malawi stock exchange by considering the
registered firms in Malawi. In that study banking sector was excluded it may change the
outcome of result. Data was taken from annual financial reports from 2007 to 2015, variation in
capex which is termed as increasing or declining were analyzed to check the association with
respect to changing in stock prices before and after the announcement of capital expenditure.
Different variables were studied as dependent variable. Correlation test was run against capital
expenditure on panel data analysis, further regression analysis has been done to found
With a confidence level of 95% capital expenditure correlates with ROCE at 0.373 and with
NPV at 0.249 and negatively with ERT 6.45e-2 and there was positive association in between
(Kim, 2011) found in previous that there’s no positive linear association between capital
expenditure and future earnings. Future earning is also depends on firm systematically choice of
a project whether it is profitable or not. He considered three measures of success. First was in the
last five year with no prior loss, second was firms who have greater than median beginning book
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 6
value to market book value ratio. From these two it was unable to confirm that firm is going to
generate positive or negative impact. However, with at least one year loss in the last five years, it
is likely to say that firm will generate strong returns with incurring capital expenditure.
capital expenditure has positive potential impact because of multiple growth opportunities
positive impact depends on the operating environment of the firm. Other factors that could
impact were controlled. Study shows that how market reacts is depend upon the growth
opportunities as well. Other variable that may affect is free cash flow. However, the response to
the announcements of capital expenditure actually depends on the operating environment of the
firm. This study was researched in Australia. Data set was of Australian registered firms.
(Stefano Bresciani and Alberto Ferraris, 2016) Researched that relational intellectual capital has
significant relationship with capital expenditure .This study provides evidence from Europe.
Company’s performance has been evaluated by considering revenue level, enterprise value, net
operating cash flow and capex. Firm needs to focus on investing opportunities which can even
give them a competitive edge. Content Analysis has been done in order to analyze the impacts of
financial and economic reports. The result shows that all were significantly associated with RIC
except enterprise value with respect to market value. The main feature of this study is sample
(Baik et al., 2013) Have done frontier analysis to predict future firm performance. The main
feature of this study is sample size 1976 – 2008. This research provides evidence that changing
in operational efficiency has positive association with firm current and future efficiency. That
study contributed to investing decision and in profitability forecasting of any firm. Firm
performance has been evaluated on the basis of annual percentage change in inventory, account
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 7
receivable, capex, gross margin, selling general & administrative expenses, effective tax, and
change in employment productivity, operating assets, asset turnover, sales, profit margin,
earning per share. After execution of regression and Pearson correlation, on the basis of frontier
analysis, the positive association was found between changes in operational efficiency and firm
performance. Other factors which may influence like fundamental signals were controlled.
(Of & Returns, 2013) It is well proven hypothesis that firm who invests in capital rather than
operational investment tends to have low stock returns as per those firms who have an opposite
characteristic which was measured by sales, total assets or the same criteria. A firm manager
should only invest in any project at a hurdle rate to only increase shareholder wealth. A fresh
insight has been provided by that research on the association of stock return and investment.
Parametric model has been adopted to make all the analysis transparent. In this research cross
sectional correlation has been executed. Two period simple models were used which shows that
the slope of investment and stock return is vary with the level of investment, function was
nonlinear which actually shows a negative correlation between these two and the reason was the
(Wachanga, 2014) The leverage i.e. degree of financing the capital with debts. As debt level will
increase of the firm, higher the levered level will be. Leverage ratio can be used for observing
(Chadha & Sharma, 2016) proved a positive correlation of capital structure on performance of
organization through evidence. Return on asset, return on equity, Tobin Q’s were used on panel
data from 2003-2014 and positive relationship was found between ROA and negative with ROE
.
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 8
(Turner & Hesford, 2019) has proved in his research through evidence from Australia. In order
to evaluate the impact of renovation capital expenditure on firm revenue, profitability, customer
satisfaction and repair & maintenance expense of the firm. 305 projects of capex were
considered and panel data from 2004 to 2010 was used. The result of that research drag the
attention of management because of short term up to 3 years effects and long term 3 to 6 years
effects has been evaluated. Result shows that revenue was significantly increased, gain in
profitability with the higher satisfaction and low maintenance expenses. In long term profitability
and revenues of that firm was declined but amazingly no changes in customer satisfaction.
(Wei, Xie, & Titman, 2001) conducted a research on association between abnormal capital
expenditure and stock return and he concluded a negative relationship between them through
evidence. Data was collected from listed companies of New York Stock Exchange (NYSE),
NASDAQ and American Stock Exchange (AMEX) with a sample size of 1635. Researcher
explained several reasons for negative relationship. Managers need to validate the investment
decisions because they need to raise capital mostly through WACC. In following years firms
(Kortmann, Gelhard, Zimmermann, & Piller, 2014) examined association between operational
efficiency and strategic flexibility. In this research there was an insight review that how and to
which extent capabilities and innovations plays a mediator role in linking between two main
variables, the main interest of researcher. Data was collected from listed firm of America and
India. This research concludes positive and significant relationship in between strategic
flexibility and operational efficiency which can define as trade off. Best practices shouldn’t
always be blindly followed by the management but flexibility should be best policy.
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 9
2.1 Hypothesis:
The general findings and result conclude that there is no single variable that can
determine the association between capital expenditure on firm performance. There are certain
H2: Director’s Commitment will moderate a relationship between capital expenditure and
Chapter 3: Methodology
This chapter will deals with the method that is used to test the hypothesis and variables,
the methods and sources from which the data is collected, the variables used to measure
The quantitative method is used in this study. The effect of capital expenditure is
examined on the financial performance of the firm (net profit). The data is collected from SCS
Trade, Pakistan stock exchange and the financial statements of the sample-listed firms.
For sampling, Top 30 firms that are listed in Pakistan Stock Exchange will be selected to
The population of this study is the listed firms on PSX, and the sample has been drawn in
the form of top 30 firms (whose data is easily available on their website and financial report)
with their data of last 5 years i.e. from year 2014 to year 2018 making the sample size of 150.
This research model represents the association between capital expenditure and firm
performance. This model was developed by (Rompho, 2016) (Wachanga, 2014) with the
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 11
registered firm of Malawi stock exchange and firms listed in the Nairobi Securities Exchange.
Independent Dependent
Variables Director’s Commitment
Variable
Capital
Control variables
Leverage Ratio
Net Profit
Firm Size
Dependent Variables:
Net Profit
Net profit specifies that how much company is generating profit from their sales as. It
measures after interest and tax made by every 100 units of sales that a firm make.(Ed et al.,
2015)
Number of outstanding
shares* MV of shares.
*100
‘0’.
Independent Variable
Leverage
The leverage i.e. degree of financing the capital with debts. As debt level will increase of the
firm, higher the levered level will be. Leverage ratio can be used for observing the performance
Firm Size
This variable can be measured through various means. It can be the net assets, market
capitalization, market share or sales. This study will use the market capitalization as an indicator
of the firm size. Firm size and capital expenditure are related in such a way that the larger the
firm size (in terms of market value of capital), the more firm toward will be innovation or
Director’s Commitment
This variable can be measured as if directors are meet the future commitment which they
hypothetical testing, As shown in model 1, 2 and 3 of Table II F change value is 0.001, 0.00 and
0.000 which is less than 0.05 its mean model is good fit. As shown in table I, Model 1 contains
the control variables. In H1 (P value = 0.99) is not showing significant impact of capital
variable and moderator. Capital expenditure with the moderating effect of director’s commitment
showing significant impact on dependent variable (Net Income) as its P value is less than 0.05
The moderator has changed the R2 from 32.1% to 36.3%. It means that the independent
variables in model 2 are explaining 32.1% variations in the dependent variable & after the role of
moderating factors, the explained variation percentage increased from 32.1% to 36.3%.
Hypothesis
Empirical
P value
Conclusion
H1: Capital expenditure has significant
impact on financial performance of 0.99 Rejected
firm.
Director's
Commitmen -
t 0.95 0.227 1 -0.045 0.005 0.016 0.387*
Capital 0.318*
Expenditure 2397186647 3885256075 -0.045 1 -0.102 * 0.144
Levarage
Ratio 88.2836 64.1982 0.005 -0.102 1 -0.166 -0.06
4159090000 4378830000
Firm Size 0 0 0.016 0.318* -0.166 1 0.394
Results of Pearson Correlation concluded that there is negative correlation in between Director’s
Commitment and capital expenditure as it shows the value -0.387. It means when Directors
fulfill any commitment with regarding of projects, it negatively impacts net income.
When any firm incurred capital expenditure, their operating expenses increase which reduces net
income. But in long run it may be covered which may results in significant change in net
income.
Capital expenditure shows positive correlation with firm size, as it shows the value 0.318.
Impact of Capital Expenditure on Firm Performance; Moderating Role of Director’s Commitment 17
Research
5.1 Discussion:
The main purpose of this research is to analyze the impact of capital expenditure on firm
performance with respect to net income and with the moderating role of director’s commitment.
In this research, Firm size and leverage ratio are used as control variable. In this study, we have
It was found in previous research that for overall sample, the impact of capital expenditure is
insignificant with firm performance until or unless you divide the sample in successful and
However, we can say that there is significant impact of capital expenditure on financial
performance of the firm with the moderating role of director’s commitment, which is evident
5.2 Conclusion:
This research concludes that capital expenditure is not significantly affected by the
variables studied in this research i.e.(net income). It is also concluded in this study that director’s
commitment level moderated the relationship between the dependent and independent variables
of this research.
Past researches have also found the similar results when they tested the relationship
between capital expenditure and firm performance but the addition of director’s commitment as
As Pakistan is in developing state, most of the firms are availing new opportunities of
expanding their business by incurring capital expenditure. Therefore, the decision of mangers
could affect the performance of firm directly. This study will be helpful to all investors,
shareholders, investment managers, who invest in the stock market sectors in Pakistan. This
study is giving an insight review about whether it is fruitful or not to invest in any firm based on
capital expenditure. If directors are fulfilling their commitment, so which kind of impact it can
have on financial performance of the firm. It is providing evidence with respect to Pakistan.
This study is currently limited to only 30 firms, because of the limited resources and
time. Future researcher can increase the sample size to find results that are more accurate.
This study is limited to only one independent variable (capital expenditure) and moderator,
which is director’s commitment. . Future researchers can add several other variables that can
measure firm performance more accurately like (ROE, ROA).In this research data of five years
has been used, span of years can be increased to have results that are more authentic.
Ethical consideration:
This research is conducted in accordance to all the ethical requirements of study. This
research makes sure that it does not disturb anyone’s confidentiality as well as it has not used
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