Asian Finance& Banking Review; Vol. 2, No. 2; 2018 ISSN 2576-1161E-ISSN 2576-1188 Impact Factor: 3.3 Published by Centre for Research on Islamic Banking & Finance and Business 42 Determinants of Firm’s Leverage and Theoretical Examination: A Study on the Food and Allied Companies in Bangladesh Saptarshi Chakma Lecturer Department of Management Rangamati Science and Technology University, Rangamati Received: December 7, 2018 Accepted: December 16, 2018 Online Published: December 23, 2018 Abstract Leverage helps to understand how much debt and equity employed by a firm to funds its operation and asset. Modigliani and Miller are the path breaker in this sector. In 1958 identified irrelevancy proposition of Firm Leverage decision. In 1963 they came with their new explanation to incorporate the effect of tax. There are some other popular theories. Jensen and Meckling agency cost theory, Scott trade off theory, Ross signaling theory, Myers and Majluf pecking order theory are the most popular one. There are several determinants in Firm Leverage used in different studies. In this study, we used some most popular determinants. They are profitability, tangibility, growth, operating leverage, liquidity, size. In this study, nine DSE listed food and allied companies’ data are used to analysis the relation between determinants and leverage and Firm Leverage theories are also tested for those companies. Food and allied sector is a constant growing sector and good option for the investors. Nine A category companies’ data are used for this study. For the data analysis descriptive data, hypothesis, correlation and regression method is used. Leverage mean of last seven-year data is 48.5%. That means there is a good combination of debt and equity. In the hypothesis, T-test: paired two sample for means is used. Null hypothesis only accepted for the tangibility determinants. That indicates there is a relationship between tangibility and leverage. In correlation matrix, it also showed that, leverage and tangibility have the strongest relation and the relation is negative. In regression model, only tangibility result is significant and the coefficient is negative. According to the result, pecking order theory, trade off theory and signaling theory play an important role in food and allied companies in Bangladesh. The analysis showed that, companies with high tangibility ratio try to finance their operations by internal finance rather than debt finance and supported theories also refer the same result. Keywords: Capital structure, Profitability, Leverage, Tangibility and Liquidity. 1. Introduction Nowadays Bangladesh is well known as a developing country with rapid growth economics. It has an ample scope for industrial development which would bring about positive outcome in the economy of our country. Industry development is necessary for the development of infrastructure development. Firm Leverage is one of the most common and important theory in the field of finance. It is the most essential element to establish a company. Firm Leverage theory refers the amount of debt and equity used by a firm to finance its operations and assets. It indicates how firms finance their overall operations and growth by using debts like long-term notes payable and equity like common stock. The main components of Firm Leverage are debt and equity. A manager always looks to find out the optimal Firm Leverage to maximize the value of the firm and minimize the cost of capital. The purpose of this study is to examine the relation between leverage and determinants of Firm Leverage decision of food and allied companies in Bangladesh. Required data collected from 9 firms’ financial statement from consecutive seven years, from their audited balance sheet and income statement. The purpose of the study is to analyzes the result both descriptive and www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 43 statistical analysis. Firm Leverage become one of the most controversial issue in the field of corporate finance since the phenomenal work of Modigliani & Miller. Most of the popular firm leverage researches are done under developed countries like Rajan and Zingales, 1995. Only a few popular works done in Bangladesh like Chowdhury, 2004; Lima, 2010; Sayeed, 2012. But the numbers are increasing. 3. Objective of the study To get a better output, several hypotheses (HP) were tested. The tested hypotheses are given below: These hypotheses will determine the Firm Leverage of food and allied firms in Bangladesh: - Table 1. Hypothesis table Null Hypothesis Alternative Hypothesis HP0: Leverage ratios and profitability are associated. HP 1: Leverage ratios and profitability are not associated. HP0: Leverage ratios and growth are related. HP1: Leverage ratios and growth are not related. HP0: Leverage ratios and tangibility are linked. HP1: Leverage ratios and tangibility are not linked. HP0: Leverage ratios and liquidity are associated. HP1: Leverage ratios and liquidity are not associated. HP0: Leverage ratios and operating leverage are related. HP1: Leverage ratios and operating leverage are not related. HP0: Leverage ratios and size are corelated. HP1: Leverage ratios and size are not corelated. 4. Literature Review There are several empirical studies regarding Firm Leverage decisions have been concisely reviewed here in terms of two segments both International evidence and Evidence from Bangladesh. In the year 1995, Rajan and Zingales had a rigorous study in this area where they came with an outcome that the various factors of Firm Leverage of US companies are size, growth, profitability and tangible assets. Lima (2010) likewise guaranteed that development rate, substantial quality, working influence, obligation administration limit, administrative proprietorship age and size have huge impact on Firm Leverage choices. They additionally reasoned that the organization cost hypothesis and static exchange off hypothesis are pertinent for the organizations in Bangladesh. 5. Methodology of the study 5.1 Data collection The number of inhabitants in the examination is the nourishment and associated firms in Bangladesh. For this investigation, sequential seven-year information will be considered. Along these lines 9 firms which have seven fiscal reports are fused right now. The organizations are browsed the rundown of Dhaka Stock Exchange (DSE) Food and Allied segment A classification firms. The organizations which used to gather the information are: ▪ Agricultural Marketing Company Ltd. (Pran) ▪ Apex Foods Limited ▪ British American Tobacco Bangladesh Company Limited ▪ Fu Wang Food Ltd. ▪ Gemini Sea Food Ltd. ▪ Golden Harvest Agro Industries Ltd. ▪ National Tea Company Ltd. ▪ Olympic Industries Ltd. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 44 ▪ Rangpur Dairy (RD) & Food Products Ltd. 5.2 Analysis of data The gathered information through audit are utilized to broke down to both distinct and exact insights. Graphic examination race to dissect the essential highlights of the information in the example. Connection network is utilized to distinguish the relationship of every factor among them. Various relapses are likewise used to decide the most significant informative factors influencing the Firm Leverageof nourishment and united firms in Bangladesh. In association with this, the general model for this examination, as is for the most part found in the current writing is spoken to by Yi,t= α + βXi,t + εi,t The subscript (i) representing the cross-sectional dimension and (t) denote the time-series dimension. The left- hand variable which is the firm’s debt ratios represents the dependent variable in the model. (Xi,t) includes a number of independent variables estimated by the model. Table 2. Variables and indicators Measurement of variables Variables Indicators Depended variable Leverage Total debt/Total asset Independent variable Profitability EBIT/Total asset Tangibility Fixed asset/Total asset Growth Annual change in total asset Operating leverage EBIT/operating revenues Liquidity Total current asset/Total current liabilities Size Natural logarithm of total asset 6. Scope of the study The study mainly focuses on finding out the relationship between the leverage and the determinants of Firm Leverage (profitability, tangibility, growth, operating leverage, liquidity, size) of a specific sector food & allied sector nine listed A categorized company. Seven consecutive year financial data are used. Different statistical method used to find out the relation like hypothesis, correlation, regression. 7. Limitations of the Study There is always a predetermined system-imposed limitation of time, exists in any research work. But with the cooperation of my supervisor, it has become possible to complete the research work satisfactory within the time limit. The limitation of the study is given bellow: ▪ The study is restricted to a sample of only nine food & allied companies. ▪ This study is limited to seven fiscal years for the analysis. ▪ Theories of books are for efficient market. These theories are not completely applicable for an inefficient market like Bangladesh. ▪ All data are secondary data. 8. Firm Leverage Theories Firm Leverage refers that how a firm used different source of funds to finance its overall operations and growth. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 45 There are two components of Firm Leverage– debt and equity. Debt collected in the form of bonds, note-payable etc. and equity is classified in the form of common stock, preferred stock or retain earnings. It helps us to understand how much debt and/or equity employed by a firm to fund its operations and asset. It also helps us to understand the risk level of the firm. In general, high debt finance companies consider high risk exposure. 8.1 Theories of Capital structure Modigliani & Miller (M&M) path breaking article in 1958 which identified irrelevancy proposition of Firm Leverage decision to firm value on an assumption of perfect world with no taxes, no transaction costs, no bankruptcy costs, equivalence in borrowing costs for both companies and investors, symmetry of market information, meaning companies and investors have the same information, no effect of debt on a company's earnings before interest and taxes. The article showed that the benefit from debt financing –financing at a low rate will be offset by the increase in cost of equity derived from high financial risk perceived by the shareholders and individual project risk has no relation to the sources of fund it uses. So market value of a company and cost of capital are independent to the extent of debt in the capital structure. In M&M they came with their new explanation to incorporate the effect of tax in the model is that value of the firm would be maximized if it uses 100% debt in its Firm Leverage since interest payments are tax deductible. In 1977 Miller new version of irrelevance theory reveals that Firm Leverage decision of a firm has no effect in real world of corporate and personal tax. There are some other popular theories come into light after a wide array of research conducted. They are- agency cost theory, trade-off theory, signaling theory and pecking order theory. 8.1.1 Agency cost theory Agency cost theory developed by Jensen and Meckling in 1976, refers that optimal Firm Leverage can be found by minimizing agency cost arising from conflict of interest among managers, owners and debt holders. First conflict between firm managers and shareholders. Firm manager directly deals with the agent on behalf of major shareholder interest. Most of the firm manager wants to run large with high probability of risk. This tends to undertake negative NPV projects. However, without a reward firm manager do not involve large and risky project even if they expect the project give positive NPV. This problem creates a conflict of interest between managers and shareholders. As a consequence, the agency cost problem arises. Sometime manager consumes firm valuable resources used their power (Jensen and Meckling, 1976). Second conflict between firm managers and debt holders. Managers are working for shareholders and they want to give priority shareholders interest. Manager invests risky project that will benefit for major shareholder not better for the bondholder. Bondholders also expect the manager invest safe and low return project that probability of risk is very low. Thus, firm can pay their debt on time. But firm manager chooses risky projects that indicated a high probability of losing capital. If they lose, no cash available to paid their loan. Most of the cases, shareholders prefer a firm manager invest risky project with high probability of success that they repaid their loan quickly and keep their ownership safe. If the risky project gave negative NPV, then shareholder has possibility of defaulter. They can’t repay their loan on time. Two ways are suggested to align managers interest with owners and debt-holders interest- ▪ The first one is to increase the participation of the owners so that they can equally influence the decision taken by the manager. ▪ The second one is to increase the use of debt financing to minimize consumption in the perk. 8.1.2 Trade-off theory Trade-off theory developed by Sco, refers that firms seek to have an optimum debt– equity ratio where marginal rise in tax benefit equals to the marginal increase of agency and bankruptcy cost generated from an extra use of leverage. Financial manager taking firm debt- equity decision based on a trade-off between cost of financial distress and interest tax shields. But there is a controversy arises in the firm. Firm manager does not sure about www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 46 how valuable interest tax shield. And they do not predict what types of financial problem are harmful for companies. According to the trade-off theory assume that debt ratio will vary from firm to firm. Firm with protected, tangible assets and high taxable income to shield indicate a high target ratio. 8.1.3 Signaling Theory Signaling Theory introduced in 1977, based on asymmetric information, refers that managers use leverage decision to give signal to the market because investors treat debt financing as a signal of high future performance and high future cash flows of the firm. Therefore, the type of financing a company uses can provide a signal of the firm’s financial position and project prospects. When a company uses debt to fund a project, it could indicate that the company believes the project will provide returns quickly and sufficient enough to repay the debt so its current investors retain the benefits. If a company uses new equity to fund a capital project, it could be interpreted as either a signal that the company has no internal profits or is unable to raise any debt. 8.1.4 Pecking order theory Pecking order theory introduced in 1984, states that there is no optimal Firm Leverage and managers follow a hierarchy of preferences for the issuance of new capital based on the cost of capital. They prefer retained earnings as the main source of financing due to its zero cost and then debt financing, followed by equity financing, because cost of debt is less than that of equity. Profitable firm borrow less amount debt because they have a low target ratio. This firms prefer internal finance when internal fund is sufficient to maximize the firm value and firm do not indicate any adverse signal that may lower the share price. Less profitable firm issue more debt because they have not enough internal funds to regulate the companies smoothly. So, they relied on external financing. This firms prefer external finance when internal fund is insufficient to run the firm. In such case, firm issue debt financing first. Then they go for equity finance. Pecking order theories do not neglect taxes and cost of financial difficulties in case of determined capital structure. However, this theory assumes, those factors are less significant than firm managers’ decision about internal and external finance to issue more new capital structure. 9. Determinants of Capital Structure There are several determinants used in different studies on determinants of capital structure. But we choose the most popular and common six determinants to find out the relationship between the determinants and the leverage. The determinants we used in this study are: ▪ Profitability ▪ Tangibility ▪ Growth ▪ Operating leverage ▪ Liquidity ▪ Size 9.1 Profitability Profitability is one of the most important determinants of Firm Leverage but there are different views in the relationship between leverage and profitability. Trade off theory and signaling theory, have showed positive relation with the leverage. In trade off theory managers try to increase their leverage to raises their profitability by achieving the tax shield. In signaling theory managers use debt financing to finance their profitable investments. On the other hand, pecking order theory referred negative relation between leverage and profitability. They think, profitable firms borrow fewer amounts of debt and internal financing as a first choice. The profitability of a firm calculates as a ratio: Profitability=EBIT/total asset www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 47 9.2 Tangibility One of the vital determinants of Firm Leverage is tangibility. Trade off theory showed a positive relation between leverage and tangibility. It used as collateral of borrowed fund. In agency cost problem suggest that tangibility has negative correlation with information asymmetry problem. Lower information asymmetry problem has lower dependence on debt and equity is more preferable. High tangibility capable firms high borrowing ability. Tangibility calculates as: Tangibility=Fixed asset/total asset 9.3 Growth Growth is the determinants which are related with all the four theories we used in this study. Singling theory and pecking order theory conclude a positive relationship in growth and leverage. They determine in their theories that companies with high growth have high debt capacity and tend to use external finance for their companies’ growth. Jensen and Meckling 1976, agency cost theory and trade off theory provides different opinion about growth. They think there is a negative relation between growth and leverage. High growth firm tend to use low external finance to reduce agency cost between firm managers and debt holders. In trade off theory high growth companies used low debt ration because their target ratio is low. Growth ratio calculates as: Growth=Annual change in total asset 9.4 Operating leverage Operating leverage is the determinants which influence trade off and pecking order theory. In trade off theory, there is a positive relation between operating leverage and leverage ratio. Higher operating leverage indicates higher risk of the firms. Since the managers does not sure about how valuable interest tax shield and they do not predict what types of financial problem are harmful for companies. They take more risk and used debt finance. In pecking order theory show negative relation between operating leverage and leverage because high risk firm use low leverage to reduce risk. Operating leverage ratio calculate as: Operating leverage =EBIT/operating revenues 9.5 Liquidity Liquidity is one of the most important determinants of capital structure. But there is a controversy about the relation between liquidity and leverage ratio. Trade off theory refers that there is a positive relation between liquidity and leverage ratio. Firms with high liquidity are more capable to pay their debt. So highly liquid firm tend to use high debt finance. On the other hand, pecking order theory refers that there is a negative relation between liquidity and leverage. Highly liquid firms used internal finance rather than external finance. Liquidity ratio calculate as: Liquidity=total current asset/total current liabilities 9.6 Size Size of the firm is a determinant of capital structure. According to trade off theory there is a positive relation between size and leverage. Large size firms have low bankruptcy cost and high capacity to get external finance. Because of diversification large firms maximize their tax benefits form debt. In signaling theory, firm with high debt finance provide signals to the investors that the firm is in a profitable position and has the ability to quick repay of the loan. So it also refers that, there is a positive relation between size and leverage. But according to pecking order theory, there is a negative relation between size and leverage. Because large firms prefer internal finance first than external finance. Size calculates as: www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 48 Size=Natural logarithm of total asset In the table below summarize the relations among the determinants of Firm Leverage (independent variables) and the theories of capital structure. Most popular four Firm Leverage theories are used in this table and the six mostly used determinants of Firm Leverageare used in this table. In this table (+) sign uses to indicate positive relation and (-) sign used to indicate negative relation. Table 3. Theoretical expectation of variables Theoretical Expectation Independent variables Agency cost Trade-off Signaling Pecking order Profitability + + - Tangibility +/- + - Growth - - + + Operating leverage + - Liquidity + - Size + + - 10. Food and Allied Sector of Bangladesh Food and allied sector is a growing sector in our country. This sector considers as one of the constant growth sectors in Dhaka Stock Exchange (DSE). The price return and change in turnover is positive in this sector for the last year. The foreign investment is increasing in this sector. There are eighteen (18) companies listed in DSE food & allied sector. In this eighteen companies nine companies are A category one is B category and the rest eight companies are Z category. In our study we use only the A category companies’ information. The list is: ▪ Agricultural Marketing Company Ltd. (Pran) ▪ Apex Foods Limited ▪ British American Tobacco bangladesh Company Limited ▪ Fu Wang Food Ltd. ▪ Gemini Sea Food Ltd. ▪ Golden Harvest Agro Industries Ltd. ▪ National Tea Company Ltd. ▪ Olympic Industries Ltd. ▪ Rangpur Dairy & Food Products Ltd. 10.1 Agricultural Marketing Company Ltd. (Pran) Program for Rural Advancement Nationally (PRAN) group was born in 1980. They are the largest processors of fruits and vegetables in Bangladesh and well known for diversify activities. The main purpose is to enrich the agricultural sector since our economy is agricultural based and develop our native farmers. They are also one of the biggest exporter in our country. PRAN listed in DSE in 1996 and now their market category is A. 10.2 Apex Foods Limited Apex foods limited incorporated their business on 1979. Apex sea food is the single largest processor and www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 49 exporter of frozen sea food of Bangladesh. They are well known in the worldwide for their high quality products. They export their product in North America, EU countries, Australia and Russia. Apex foods limited listed in DSE in 1981 and now their market category is A. 10.3 British American Tobacco Bangladesh Company Limited In 1998 Bangladesh Tobacco Company change their name as a British American Tobacco Bangladesh company limited and aligning the corporate identity with other operating companies in the British American Tobacco group. It is one of the world largest international business and sold their products more than 200 markets all over the world. They are well known for their quality tobacco and diversification according to consumer choice. They listed in DSE in 1977. 10.4 Fu Wang Food Ltd. Fu Wang food ltd. start their business in 1997 and certified in 1998. They introduce variety of products to cover the market. They have different food items like bred, biscuit, cake, toast, chocolate, instant noodles, drinking water, energy drink etc. Fu Wang food listed in DSE in 2000. 10.5 Gemini Sea Food Ltd. Gemini sea food ltd. start their business in 1982. The main target this firm is to provide quality product according customer requirement. They believe that “Hygienic Product Healthy Trade”. They export our quality products to U.S.A & EU countries like U.K, Germany, Denmark, Netherlands, Belgium and Russia etc. They listed in DSE in 1985. 10.6 Golden Harvest Agro Industries Ltd. Golden harvest Agro Industries ltd. is a company of Golden Harvest group. It is one of the pioneer frozen food manufacturing companies in our country. They are well known for their good quality and tasty frozen foods both locally and internationally. They export their product in USA, Canada, Australia, Middle East and the European countries. They listed in DSE in 2014. 10.7 National Tea Company Ltd. National tea company ltd. starts their business in 1978 as a joint venture and government and its financial organization holds majority of the share (51%) and the rest are owned by the general public. This company owned 12 tea estates which cover almost fifty percent of the total tea cultivation area. It sold 5.20 million kg. tea through Chittagong auction market annually. National Tea Company ltd. listed in DSE in 1979. 10.8 Olympic Industries Ltd. Olympic industries ltd. incorporates their business in 1979 as a battery manufacturer but later they diversify their business by manufacturing biscuits and confectionary items in 1996. Today they are the largest biscuit manufacturer in Bangladesh. They think quality of their products and loyalty to their customers make Olympic so popular. Olympic listed in DSE in 1989. 10.9 Rangpur Dairy & Food Products Ltd. They collect the raw milk from the northern part of our country and processed the raw milk in Ultra High Temperature (UHT). It also reduces the risk of infection. They use high quality packaging system to maintain the milk for long time. Rangpur Dairy & Food Products Ltd. listed in DSE in 2011. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 50 11. Analysis of the Study 11.1 Descriptive statistics In this study we examine the nine food and allied listed companies’ seven-year data. Here we showed the mean, standard deviation, maximum and minimum value of the ratios. Table 4. Data descriptions Variable Mean Max Min Standard deviation Leverage 0.485113 1.022036 0.047937 0.252917 Profitability 0.134335 0.514757 -0.03007 0.126493 Tangibility 0.445406 0.843248 0.046722 0.213776 Growth 0.159228 1.129147 -0.27103 0.229247 Operating leverage 0.127053 0.449611 -0.01945 0.112153 Liquidity 3.132551 77.13767 0.678286 9.592806 Size 20.58751 22.93377 16.39201 1.542438 Leverage means is 48.5% which indicates equity used in this sector as 51.5%. That means leverage and equity portion almost equal in this sector which indicates a good combination of debt and equity. Standard deviation is 25% in leverage ratio. Profitability in these companies is positive and it is 13% which refers profitability of those companies is 13%. It is good sign for food & allied companies in Bangladesh. In profitability minimum value is -3% and maximum value is 51.5%, there is huge gape in these two values and that’s why the standard deviation is 13.5%. Tangibility is the fixed asset portion of a firm. Here the average is almost 44%. That means the firms have a large portion of fixed assets. In tangibility minimum value 4.7% and maximum value 84%. The standard deviation is 21%. Growth is 16% which means that the firms growth last seven years is 16% which is positive and good enough. It refers that firms in this sector growing year to year. Standard deviation is 23%. Operating leverage calculate as a EBIT to operating revenues. Operating leverage mean is 12.7% which means earnings of the firms after basic costs. So the earnings ratio of the firm over last seven years is positive and quiet satisfactory. Standard deviation is 11%. Liquidity is 3.13 which means firms are not use their liquid asset efficiently and their performance is not satisfactory. They should use more their liquid asset in their business activities. Standard deviation is 9.6. Size of the firm is another determinant of Firm Leverage calculates as a natural logarithm of total asset. The mean of the firm’s total asset natural logarithm over last seven years is 20.58 and the standard deviation is 1.54. 11.2 Hypothesis T-test: Paired two samples for means is used. Significance level is 5%. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 51 Table 5. Hypothesis result T-test: Paired two samples for means is used. Significance level is 5%. Null Hypothesis Alternative Hypothesis Result HP0: Leverage ratios and profitability are associated. HP 1: Leverage ratios and profitability are not associated. HP0 hypothesis rejected HP0: Leverage ratios and growth are related. HP1: Leverage ratios and growth are not related. HP0 hypothesis rejected HP0: Leverage ratios and tangibility are linked. HP1: Leverage ratios and tangibility are not linked. HP0 hypothesis accepted HP0: Leverage ratios and liquidity are associated. HP1: Leverage ratios and liquidity are not associated. HP0 hypothesis rejected HP0: Leverage ratios and operating leverage are related. HP1: Leverage ratios and operating leverage are not related. HP0 hypothesis rejected HP0: Leverage ratios and size are corelated. HP1: Leverage ratios and size are not corelated. HP0 hypothesis rejected H0 accepted or rejected based on the P value and the t-stat value of the result. If P value is lower than .05 than reject the null hypothesis and if P value is greater than or equal .05 than accept the null hypothesis. If t-stat value is greater than t critical value than reject the null hypothesis otherwise we accept the null hypothesis. According to these two conditions only tangibility and leverage null hypothesis is accepted. That means there is relationship between leverage ratios and tangibility. All other determinants relation with leverage is rejected because of lower P value and higher t-stat value. 11.3 Correlation In this correlation matrix, showed the relation between the dependent variable (leverage) and independent variables (Profitability, tangibility, growth, operating leverage, liquidity, size). It also showed the internal relations among the independent variables. Table 6. Correlation matrix Leverage Profitability Tangibility Growth Operating leverage Liquidity Size Leverage 1 Profitability 0.162528711 1 Tangibility -0.637004421 -0.100731037 1 Growth 0.089690154 0.117833829 -0.17938 1 Operating leverage -0.5237648 0.002155883 0.597904 0.159278 1 Liquidity 0.12614236 0.046138026 -0.09529 -0.06436 -0.08701 1 Size -0.252793763 -0.655249788 0.151824 0.072891 0.314651 -0.09575 1 The correlation matrix showed that leverage has positive relation with profitability. It indicates that firms which have high profitability ratio have preference to use debt finance. Leverage has also positive relation with growth and liquidity. Tangibility, operating leverage and size have negative relation with leverage. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 52 P value is one of the most important determinants in the regression model. If P value is lower than or equal 0.05 indicates, there is a strong relationship between dependent and independent variable. In this table, only tangibility and liquidity P value is lower than 0.05. So these variables are considered significant. T-stat is a statistic that indicates the size of an effect, from the standpoint of a bell curve (a probability distribution). The further away from Zero (0) the more likely that the effect is "statistically significant". In this table, only tangibility variables t stat value is greater than 2. So this variable is significant. Coefficient represent the beta which refers risk. The first intercept coefficient represents the constant value of the regression model. So the regression model is: Yi,t= α + βXi,t + εi,t If we elaborate the model: Yi= α + β*profitability + β*tangibility + β*growth + β*operating leverage + β*liquidity + β*size Yi= 0.998598508+0.126890261 * profitability+(-0.564312855) * tangibility+0.044125089 * growth+(- 0.494013774) * operating leverage+ 0.001445136* liquidity+( -0.01107319) *size 11.4 Testing of Firm Leverage theories Theories showed the relation between the determinants and leverage ratios. They should be positive and negative. According to the different statistical analysis we find the relation between the determinants and the leverage ratio. Now we find out which theories fit for the determinants of Firm Leverageand leverage ratio of food and allied companies in Bangladesh. In this table below, showed the relation between the determinants and leverage ratio according to theories and in terms of the data analysis. Table 7. Determinants findings and supporting theories. Theoretical Expectation Findings Supporting theory Independent variables Agency cost Trade- off Signaling Pecking order Profitability + + - + Trade-off, Signaling Tangibility +/- + - - Pecking order Growth - - + + + Signaling & pecking order Operating leverage + - - Pecking order Liquidity + - + Trade-off Size + + - - Pecking order The finding is that tangibility, growth, operating leverage and size follow pecking order theory. They have also negative relation with leverage except growth. The rest two profitability and liquidity follow trade off theory. Profitability and growth also follow signaling theory. They both are positive that means they provide the investors a positive signal. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 53 12. Findings of the study According to correlation matrix there is a positive relation between profitability and leverage ratio. The coefficient of profitability is also correct. That means high profitable firms prefer debt finance for their business operations. Because of high profitability they have the ability to pay the debt and also excess of loan. Tangibility is the only determinants which has significant value in regression model and also show strong relation in correlation matrix. In hypothesis, tangibility H0 also accepted. There is a negative relation between tangibility and leverage which indicates firms with high fixed asset tend to use internal finance. Though, they have easy access of loan because of large amount of fixed asset. The relation between growth and leverage is not so significant. The correlation value is very low but correlation and coefficient value is positive. Operating leverage has a strong negative relation with leverage. That means companies with high income prefer to use their internal finance like retain earnings rather than external finance. Liquidity has very low value in correlation and insignificant in regression model. Though the value is very low but the relation is positive. Size has a negative correlation with leverage. That refers that, large size companies use more internal finance and less external finance. Packing order theory and trade-off theory have great impact on food and allied companies in Bangladesh. Packing order theory is followed because of internal financing like retain earnings and trade off theory followed because manager tend to take less risk that’s why they try to avoid external financing. Signaling theory also play important role in this sector. 13. Conclusion The determinants of capital are not strongly influence the leverage decision of food and allied sector in Bangladesh except tangibility. Tangibility is the determinants which has significant value and relation with leverage. There is a negative relation between leverage and tangibility. Companies high fixed asset have high tangibility ratio prefer internal finance compare to external finance for their business operations. In the theories of capital structure, packing order theory and trade-off theory have great impact on our food and allied companies in Bangladesh. Packing order theory suggest to use internal finance like retain earnings due to its zero cost and in trade off theory manager taking firm debt-equity decision based on a trade-off between cost of financial distress and interest tax shields. References Chowdhury, M. U. (2004); Firm Leverage Determinants: Evidence from Japan & Bangladesh; Journal of Business Studies, xxv (1), 23-45. Jensen, M., & Meckling, W. (1976); Theory of the firm: Managerial behavior, agency costs and ownership structure; Journal of Financial Economics, 3(4), 305-360. Lima, M. (2010); An insight into the Firm Leverage determinants of the pharmaceutical companies in Bangladesh; GBMF Conference, 2010. Rajan, R. G., & Zingales, L (1995); What do we know about capital structure? Some evidence from international data; Journal of Finance, 50, 1421-1460. Sayeed, A. M. (2012). The Determinants of Firm Leverage for Selected Bangladeshi listed companies; International Review of Business Research Papers, 7(2), 21-36. www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 54 Appendix Nine companies last seven years data Year Company name Total debt Total current liabilities Total asset Fixed asset Total current asset Operating revenues EBIT 2017 Apex food ltd 1102179 663 1077907 226 1758501 536 3855338 16 1372967 720 16427721 07 4469543 2016 9261507 63 8831010 97 1545510 181 3599302 52 1185579 929 20319469 45 -20800413 2015 1157463 237 1104763 634 1779946 562 3307064 94 1449240 068 27517798 85 -53525355 2014 1130977 648 1040962 126 1693029 263 3726989 73 1320330 290 38446812 56 31319044 2013 1240793 403 1128293 403 1758652 867 3500994 01 1408553 466 33057172 80 20664243 2012 1019973 962 8774739 62 1571415 244 3490459 84 1222369 260 39333461 04 18734510 2011 1079963 920 9302018 88 1485155 738 2169777 00 1268176 843 32073147 33 9059599 2010 1136280 606 2017 British American Tobacco 1646500 1 1363696 5 3534758 3 1541187 3 1993571 0 16563376 0 13926734 2016 1498131 2 1245028 6 2959083 1 1366501 5 1592581 6 14371166 4 13200527 2015 1561150 9 1410283 5 2707501 9 1201857 6 1505644 4 12680460 2 11534652 2014 9562208 8314769 1846379 8 8513167 9950631 10958171 0 9504368 2013 8001553 7029777 1503449 3 5861627 9172866 90174080 6912702 2012 7239749 6300705 1315104 9 5376634 7774415 75357351 5246089 2011 7128724 6323404 1336943 3 5315562 8053871 65986503 3145629 2010 1201956 5 2017 4802167 54 3841025 20 1581852 767 5640893 36 9767634 31 58678768 7 101924432 2016 4432930 62 3866021 33 1482203 822 5585534 62 8736503 60 76710939 2 134364942 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 55 2015 Fu-Wang foods ltd. 3914561 48 3254515 90 1343232 984 5122796 20 7809533 64 81985185 0 169903795 2014 3406547 10 2625633 29 1179301 123 4799823 40 6493187 83 79440601 4 104922031 2013 2926293 79 2617136 38 1070394 684 4834268 76 5369678 08 78512652 5 107712285 2012 2601093 46 2601093 46 9998698 91 4751656 49 4747312 42 75845905 0 114100545 2011 2451310 79 2451310 79 8795389 42 3879200 56 4718147 28 70916856 8 117527552 2010 5428772 82 2017 Pran(Agric ultural marketing com. Ltd.) 8892357 03 7258336 66 1463022 240 4741943 53 9888278 87 23803354 93 193375561 2016 9148193 65 6975322 12 1459268 485 5446370 29 9146314 56 20915538 54 190285679 2015 9886606 91 5398162 78 1505711 652 6580816 31 8476300 21 18865053 85 73888029 2014 6088439 75 5412394 63 1095910 217 3418084 93 7541017 24 17272176 69 74278680 2013 6510617 87 5655367 87 1137169 643 3389773 11 7981923 32 15544468 36 70621379 2012 7112438 21 5762903 21 1167556 801 3896744 99 7778823 02 14790834 63 69884451 2011 7424684 82 5917684 82 1172667 837 4158256 88 7568421 49 13163455 76 58060062 2010 1115683 180 2017 Olympic 3707466 711 3408642 811 9120317 797 2363826 358 6756491 439 11290557 541 215312959 4 2016 3109495 848 2859716 979 7640768 208 1963251 175 5677517 033 10965042 877 211644008 0 2015 2382025 686 1988098 981 5763679 785 1909946 076 3853733 709 89961485 94 143117004 7 2014 2526239 640 1977232 044 5048637 186 1869464 492 3179172 694 79223538 76 118491576 9 2013 1767679 547 1517602 918 3693672 553 1432816 473 2260856 080 70931793 69 931270071 2012 1294469 294 1037540 875 2591236 306 1201849 350 1389386 956 60033420 18 697570228 2011 1005533 832 8622446 37 1850322 260 7742549 33 1076067 327 38851018 24 392222519 2010 1361913 744 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 56 2017 Golden harvest agro industries ltd. 1026466 518 7055677 43 5044390 614 3573568 441 1470822 173 62443865 7 221338024 2016 9917837 36 4796108 99 4006564 213 2750054 728 1256509 485 52056381 3 214765123 2015 9575501 12 4692200 55 3440355 786 2112805 705 1327550 081 47207772 9 124412913 2014 6034123 35 4618579 23 2614274 832 1293112 465 1321162 367 41869057 5 156521438 2013 4279623 35 3600029 68 1549432 414 1024677 371 3752263 05 35071920 2 113056661 2012 2583723 00 1872380 64 1151988 069 9276869 81 2243010 88 30435398 2 136840856 2011 2658794 15 2016846 78 1283278 696 9112658 41 3256482 05 28365487 9 125846782 2010 1020135 468 2017 Gemini sea food ltd. 7290579 44 7224131 98 7720125 28 3607012 3 7359414 05 13551241 37 70247040 2016 3389941 59 3323932 27 3625919 31 3765275 5 3249391 76 11121376 64 56276303 2015 3715539 50 3648100 30 3740189 41 4041399 0 3336049 51 90523889 5 43953578 2014 2197907 05 2121941 05 2150519 08 4077736 4 1742745 44 95454056 8 45400224 2013 3012788 79 2933009 19 2950073 07 4272013 0 2522871 87 76697116 2 34228981 2012 2065428 23 2208579 2171978 48 4683320 5 1703646 43 12162930 05 47546426 2011 1878526 40 1523589 72 2015683 95 4827785 6 2315680 54 10050265 43 42356847 2010 2348855 64 2017 National tea company 1189238 971 5928652 70 2132951 221 1730819 005 4021322 16 98566997 4 104392614 2016 1170799 425 6565240 21 2072299 643 1621391 111 4509085 33 95934410 4 163120468 2015 9999104 50 4949059 54 1930693 798 1574521 010 3561727 88 34965317 0 20011608 2014 9714636 34 5124318 34 1804403 178 1448875 981 3555271 97 83773240 1 61597345 2013 9052079 34 4460937 22 1730513 915 1325131 628 4053822 87 85681691 0 181875020 2012 8023525 34 3551234 63 1528704 254 1215198 919 3135053 35 89197157 3 263175480 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 57 2011 7563258 91 2495284 31 1417909 243 1195648 702 2536954 84 92158467 5 285648206 2010 1323930 070 2017 RD & food products ltd. 1236094 41 1071474 00 1104929 064 7048319 77 4000970 87 53243092 4 52549104 2016 9930816 6 8712380 6 1045252 046 6885111 74 3567408 72 49443387 1 42863417 2015 8319358 6 7322633 9 1012279 083 6745009 76 3377781 07 46858950 7 41440980 2014 5476659 6 4776429 8 9493098 64 6290847 28 3202251 36 46779555 8 48223587 2013 4296593 9 3733873 3 8963089 20 5888036 02 3075053 18 43242251 3 49893432 2012 5677442 3 5257078 0 8864774 35 5880305 02 2984469 33 39309637 3 44795983 2011 6052823 5 4275896 7 9789004 61 5236984 70 2754478 26 35401295 8 40198752 2010 8834958 73 Ratios No . Year Company name Leverage Profitab ility Tangibility Growth Operating leverage Liquid ity Size 1 2017 Apex food ltd 0.63 0.00 0.22 0.14 0.00 1.27 21.3 2 2016 0.60 -0.01 0.23 -0.13 -0.01 1.34 21.2 3 2015 0.65 -0.03 0.19 0.05 -0.02 1.31 21.3 4 2014 0.67 0.02 0.22 -0.04 0.01 1.27 21.2 5 2013 0.71 0.01 0.20 0.12 0.01 1.25 21.3 6 2012 0.65 0.01 0.22 0.06 0.00 1.39 21.2 7 2011 0.73 0.01 0.15 0.31 0.00 1.36 21.1 8 2010 0.47 0.39 0.44 0.19 0.08 1.46 17.4 9 2017 British American Tobacco 0.51 0.45 0.46 0.09 0.09 1.28 17.2 10 2016 0.58 0.43 0.44 0.47 0.09 1.07 17.1 11 2015 0.52 0.51 0.46 0.23 0.09 1.20 16.7 12 2014 0.53 0.46 0.39 0.14 0.08 1.30 16.5 13 2013 0.55 0.40 0.41 -0.02 0.07 1.23 16.4 14 2012 0.53 0.24 0.40 0.11 0.05 1.27 16.4 15 2017 Fu-Wang foods ltd. 0.30 0.06 0.36 0.07 0.17 2.54 21.2 16 2016 0.30 0.09 0.38 0.10 0.18 2.26 21.1 17 2015 0.29 0.13 0.38 0.14 0.21 2.40 21 18 2014 0.29 0.09 0.41 0.10 0.13 2.47 20.9 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 58 19 2013 0.27 0.10 0.45 0.07 0.14 2.05 20.8 20 2012 0.26 0.11 0.48 0.14 0.15 1.83 20.7 21 2011 0.28 0.13 0.44 0.62 0.17 1.92 20.6 22 2017 Pran(Agricul tural marketing com. Ltd.) 0.61 0.13 0.32 0.00 0.08 1.36 21.1 23 2016 0.63 0.13 0.37 -0.03 0.09 1.31 21.1 24 2015 0.66 0.05 0.44 0.37 0.04 1.57 21.1 25 2014 0.56 0.07 0.31 -0.04 0.04 1.39 20.8 26 2013 0.57 0.06 0.30 -0.03 0.05 1.41 20.9 27 2012 0.61 0.06 0.33 0.00 0.05 1.35 20.9 28 2011 0.63 0.05 0.35 0.05 0.04 1.28 20.9 29 2017 Olympic 0.41 0.24 0.26 0.19 0.19 1.98 22.9 30 2016 0.41 0.28 0.26 0.33 0.19 1.99 22.8 31 2015 0.41 0.25 0.33 0.14 0.16 1.94 22.5 32 2014 0.50 0.23 0.37 0.37 0.15 1.61 22.3 33 2013 0.48 0.25 0.39 0.43 0.13 1.49 22 34 2012 0.50 0.27 0.46 0.40 0.12 1.34 21.7 35 2011 0.54 0.21 0.42 0.36 0.10 1.25 21.3 36 2017 Golden harvest agro industries ltd. 0.20 0.04 0.71 0.26 0.35 2.08 22.3 37 2016 0.25 0.05 0.69 0.16 0.41 2.62 22.1 38 2015 0.28 0.04 0.61 0.32 0.26 2.83 22 39 2014 0.23 0.06 0.49 0.69 0.37 2.86 21.7 40 2013 0.28 0.07 0.66 0.35 0.32 1.04 21.2 41 2012 0.22 0.12 0.81 -0.10 0.45 1.20 20.9 42 2011 0.21 0.10 0.71 0.26 0.44 1.62 21 43 2017 Gemini sea food ltd. 0.94 0.09 0.05 1.13 0.05 1.02 20.5 44 2016 0.93 0.16 0.10 -0.03 0.05 0.98 19.7 45 2015 0.99 0.12 0.11 0.74 0.05 0.91 19.7 46 2014 1.02 0.21 0.19 -0.27 0.05 0.82 19.2 47 2013 1.02 0.12 0.14 0.36 0.04 0.86 19.5 48 2012 0.95 0.22 0.22 0.08 0.04 77.14 19.2 49 2011 0.93 0.21 0.24 -0.14 0.04 1.52 19.1 50 2017 National tea company 0.56 0.05 0.81 0.03 0.11 0.68 21.5 51 2016 0.56 0.08 0.78 0.07 0.17 0.69 21.5 52 2015 0.52 0.01 0.82 0.07 0.06 0.72 21.4 53 2014 0.54 0.03 0.80 0.04 0.07 0.69 21.3 54 2013 0.52 0.11 0.77 0.13 0.21 0.91 21.3 55 2012 0.52 0.17 0.79 0.08 0.30 0.88 21.1 56 2011 0.53 0.20 0.84 0.07 0.31 1.02 21.1 57 2017 0.11 0.05 0.64 0.06 0.10 3.73 20.8 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 59 58 2016 RD & food products ltd. 0.10 0.04 0.66 0.03 0.09 4.09 20.8 59 2015 0.08 0.04 0.67 0.07 0.09 4.61 20.7 60 2014 0.06 0.05 0.66 0.06 0.10 6.70 20.7 61 2013 0.05 0.06 0.66 0.01 0.12 8.24 20.6 62 2012 0.06 0.05 0.66 -0.09 0.11 5.68 20.6 63 2011 0.06 0.04 0.53 0.11 0.11 6.44 20.7 Hypothesis t-Test: Paired Two Sample for Means Leverage Profitability Mean 0.485113459 0.134335175 Variance 0.063966837 0.016000565 Observations 63 63 Pearson Correlation 0.162528711 Hypothesized Mean Difference 0 df 62 t Stat 10.55596582 P(T<=t) one-tail 8.84586E-16 t Critical one-tail 1.669804163 P(T<=t) two-tail 1.76917E-15 t Critical two-tail 1.998971517 t-Test: Paired Two Sample for Means Leverage Tangibility Mean 0.485113459 0.445406088 Variance 0.063966837 0.045700274 Observations 63 63 Pearson Correlation -0.63700442 Hypothesized Mean Difference 0 df 62 t Stat 0.745867839 P(T<=t) one-tail 0.229282948 t Critical one-tail 1.669804163 P(T<=t) two-tail 0.458565896 t Critical two-tail 1.998971517 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 60 t-Test: Paired Two Sample for Means Leverage Growth Mean 0.485113459 0.159227798 Variance 0.063966837 0.052554099 Observations 63 63 Pearson Correlation 0.089690154 Hypothesized Mean Difference 0 df 62 t Stat 7.940284723 P(T<=t) one-tail 2.51173E-11 t Critical one-tail 1.669804163 P(T<=t) two-tail 5.02347E-11 t Critical two-tail 1.998971517 t-Test: Paired Two Sample for Means Leverage Operating leverage Mean 0.485113459 0.12705305 Variance 0.063966837 0.012578328 Observations 63 63 Pearson Correlation -0.5237648 Hypothesized Mean Difference 0 df 62 t Stat 8.718548815 P(T<=t) one-tail 1.13167E-12 t Critical one-tail 1.669804163 P(T<=t) two-tail 2.26333E-12 t Critical two-tail 1.998971517 t-Test: Paired Two Sample for Means Leverage Liquidity Mean 0.485113459 3.132551199 Variance 0.063966837 92.02192553 Observations 63 63 Pearson Correlation 0.12614236 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 61 Hypothesized Mean Difference 0 df 62 t Stat -2.19708905 P(T<=t) one-tail 0.015880062 t Critical one-tail 1.669804163 P(T<=t) two-tail 0.031760124 t Critical two-tail 1.998971517 t-Test: Paired Two Sample for Means Leverage Size Mean 0.485113459 20.58751243 Variance 0.063966837 2.379115398 Observations 63 63 Pearson Correlation -0.25279376 Hypothesized Mean Difference 0 df 62 t Stat -98.1951863 P(T<=t) one-tail 4.70512E-70 t Critical one-tail 1.669804163 P(T<=t) two-tail 9.41024E-70 t Critical two-tail 1.998971517 Regression Summary Output Regression Statistics Multiple R 0.675622233 R Square 0.456465402 Adjusted R Square 0.398229552 Standard Error 0.001961972 Observations 63 ANOVA df SS MS F Significance F Regression 6 1.810316186 0.301719364 7.838219976 3.79532E-06 Residual 56 2.155627738 0.038493352 Total 62 3.965943924 Coefficients Standar d Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.9986 0.5218 1.9137 0.0608 -0.0467 2.0439 -0.0467 2.0439 www.cribfb.com/journal/index.php/asfbr Asian Finance & Banking Review Vol. 2, No. 2; 2018 62 Profitability 0.1269 0.2816 0.4506 0.6540 -0.4372 0.6910 -0.4372 0.6910 Tangibility -0.5643 0.1580 -3.5717 0.0007 -0.8808 -0.2478 -0.8808 -0.2478 Growth 0.0441 0.1186 0.3721 0.7112 -0.1934 0.2817 -0.1934 0.2817 Operating leverage -0.4940 0.3214 -1.5369 0.1299 -1.1379 0.1499 -1.1379 0.1499 Liquidity 0.0014 0.0026 0.5503 0.5843 -0.0038 0.0067 -0.0038 0.0067 Size -0.0111 0.0241 -0.4591 0.6480 -0.0594 0.0372 -0.0594 0.0372 Copyrights Copyright for this article is retained by the author(s), with first publication rights granted to the journal. 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