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Study Of Sales Growth And Debt Financing Finance Essay


The determinants of corporate borrowing was an empirical research, hence a terrific amount of prior researches focused on to explore the determinants of corporate borrowing, since 1960s. Corporate borrowing decision effects was remained as an area of growing interest for researchers in the last three decades, as the presence of the a phenomenon has been evidenced even in the most developed capital markets of the world (Guedes and Opler, 1996). In addition, the sales growth was defined as a pinpoint determinant for firm financial decision towards firm sales growth opportunities and financial debt capacity, in the same studies.

The debt and equity were remained main two areas of interest which were observed for decision making in corporate finance of the governance systems. As the earlier examined researches explore the factor of debt maturity but usually not focus on sales growth as determinants of corporate debt (Myers and Stewart C., 1977). In addition, the same study focuses on to include and explore the sales growth of firm as a determinant of corporate borrowing.

Firms, in general, financed projects with long-term debt to avoid riskiness of project and hide the mismanagement activities under the cash flow of project, the cash flows were obtained from investment of the project before the debt maturity date (Guedes and Opler, 1996). While same studies further addressed an important issue for firm if the projects were financed with short-term debt. For instance, according to Barclay, Michael J., Clifford W., and Smith Jr. (1995). that the term and conditions for maturity of debt of firm’s were reduced with growth opportunities, and raised with the size and credit quality of firm. Myers & Stewart C. (1977). has also suggested firms to shorten debt when cost of contracting was high.

Firm’s activities to financed long-term debt, in an aspect to attain firm’s growth opportunities such sales growth; had significant impact on short-term debt of the firm due to increased level of inventory and may fail to sustain receivables turnover (Stohs, Mark H., and Mauer C., 1996,). Further, the same studies defined that less risky and probably larger firm used long-term debt financing with meager growth opportunities, so the liquidity risk was highly involved for firm short-term borrowing decision. According to Diamond & Douglas W. (1991a). debt risk were defined as the borrower risk or the ability of borrower to repay interest, principle amount and timely fulfill claims terms.

Froot, Kenneth A., David S, and Stein C. (1993) addressed that loss of projects can be a cause due to short-term debt if project has high refinanced interest rate due to imperfections of credit market. Firms also experienced the distress for indirect cost of financial such that loss of inventory or the incremental proportion of inventory held and decline in the receivable turnover for the purpose of firm sales growth. Rizzi & Joe (1994). addressed the sales growth and risk that only high quality firms were able and sustained in the credit market for long term borrowing, while the low quality firm screened out from long term debt market. While the available short term debt market has high risk for low quality firms, even that firms financed to cope up growth opportunities, usually firms growth opportunities were identified with sales growth of the firm.

1.2 Problem Statement

The debt financing was to be considered as one of the crucial issues in the corporate financing, the sales growth of the firm was one of the major determinants of the corporate debt financing. The purpose for the study of sales growth and debt financing is that this is the crucial issue for firms how efficiently to avail firm’s growth opportunities such that sales growth. The main objective of this study was to know that how borrowing decision of the firm such that short term debt was affected by the sales growth of the firm.

The fundamental purpose of study was to observe the impact of sales growth in detail by Guedes & Opler (1996)., and Saumitra N. (2002). presented the detailed information regarding the determinants of corporate borrowing such that sales growth and the firm debt financing decision in Pakistan. The scope of this study was to analyze the impact of sales growth on corporate borrowing such that short term debt financing decision of the firm to avail growth opportunities of the firm on the basis of debt financial decision factors.

1.3 Hypotheses

The central query was raised in front of firms to borrow new financing as cope up the growth opportunities of the firm in the form of sales growth opportunities. The new investment was to be required for the operational and the manufacturing activities of the firm whether to use debt financing or not, if the debt financing decision was to be used so the lender and borrower noticed that at what level of risk and the sales growth of the firm may affect the short term debt financing decision. In selection of the financing decision; firm’s past, current and expected activities was to be the crucial for lender and borrower, such that sales growth, inventory held, and liquidity condition of the firm. Many Authors as Guedes & Opler (1996)., and Saumitra N. (2002). discussed the sales growth as a main factor affecting to debt financing decision of the firm in research. The Hypothesized relationship of the variable is provided below:

H1: There is a significantly positive impact of sales growth on corporate borrowing.

H2: There is a significantly positive impact of inventory held on corporate borrowing.

1.4 Outline of the Study

The research structured as follows. Chapter one based on the introduction of the thesis, which consists of the some introduction of the liquidity by different authors, the statement of problem, scope and objectives, hypothesis etc. Chapter two consists of literature review given by different authors on impact of sales growth on corporate borrowing. Chapter three described methodology which is composed of justification of the selection of the variables utilized in analysis sample, the data, technique and hypothesis, also estimate model utilized in analysis. In chapter four, analyses of the results were there which were taken after the data processing. Chapter five contained the final results, conclusions and recommendations. References are included in chapter number six.



A lot of research has already been conducted in the field of identifying the best determinants of Corporate Borrowing by various researchers. Most of the research work suggested that the corporate borrowing vary from company to company and similarly from decision factor to factor.

Marsh, P. R. (1982) addressed that the borrowing decisions were taken by firms both by raising debt or finance, here question raised for corporation, what level of financing is required and which financing decision would be better for firm health. The firms borrowing decisions biased over its target level of debt, if its debt was below the target level of debt, so, the decision of debt financing would taken, otherwise financing decision was taken by firms due to signal of existing level of borrowing was above its target level of debt. The significant flotation costs for existence of corporation’s means that companies required to plan issues with objective to minimize both costs of its target ratio deviation and flotation costs. Over time fluctuating, it gave rise to infrequent issues of firm with its targeted debt ratio and firms clearly identified that what its level of target is.

Miller M. & Rock K. (1977) debated over debt and explained two points; first, shift issue occurred in firm decision towards either equity or debt due to any change in level of tax, hence issue effect either temporary lasting until equilibrium level was restored, or shift issue remained permanent over target ratio of firms. The second point were elaborated that the probability of firm financial distresses and systematic risk level influenced the target debt levels of firm, it was defined that the highly operating risk of firm used the less level of debt financing.

Myers S.C., Brealey R. & Schaefer S. (1977) argued that companies avoid fixed interest rate of long term debt due to uncertainty of future rates of inflation and instead of long term debt rely over variable rate of short term debt. Barges (1968) explained the ability of a firm towards sales growth rate and capacity of debt, the explanation were shown with two factors, first the expected growth rate of future earnings of firm and the probability of expected sales growth and earnings of firm. Generally, high rate of expected future earning signify a greater capacity of a firm to carry debt; hence low expected future earnings mean the opposite. The degree of uncertainty for any level of expected future earnings for debt capacity of firm was served by knowing a limiting factor.

Barclay, Michael J., Clifford W., & Smith Jr. (1995) showed that credit quality and size moderately effect on firm’s to augment its debts term to maturity, and firm’s debt falls with growth opportunities. In a related article, Stohs, Mark H., & Mauer C. (1996) defined that larger firms most likely used the long term debt to avail the growth opportunity of its sales.

The earlier studies examine the corporate debt maturity on behalf of issues of incremental debt rather than to investigate the maturity of all liabilities on balance sheet of a firm. By studying the liabilities to assets on balance sheets could answer some uninvestigated questions about impact of sales growth on corporate borrowings.

Myers S.C., Brealey R. & Schaefer S. (1977) suggested that agency cost and problems of debt can be controlled by firm to shortening the worth of its debt with respect to the volume of its sales. While some firms gain incentives from liquidity risk to borrow long term debt, it may not be able to compensate investors to bear credit risk of long-term debt for the sake of sales growth; it may indicate the low quality projects (Diamond & Douglas W. 1991a.) and (Stiglitz, Joeph & Weiss,1981). Hence the low-quality firms can’t sustain their position or can be screened out from long-term debt market, only high credit quality firms can be stable and able to borrow long-term debts. In contrast, larger firms are much more likely to survive in the long run than smaller firms (Queen, Maggie, and Richard R., 1987).

Brick, Ivan, and Ravid S. (1985) examined that interest payments of different time patterns affect the borrowers and lenders with respect to firms’ volume of sales. It was argued that borrowers seek to maximize the present value of interest tax shields by accelerating interest payments, while lenders seek to minimize the present value of their tax liabilities by slow down interest payments.

Leff (1979), Khanna T. &Palepu K. (2000) addressed that the dominant perspective and minimizing perspective of transaction costs on business groups plays a crucial role on firm’s affiliations with these groups to overcome the barriers in an inefficient market. The view of transaction cost minimizing is characterized by weak governance system of firms, in part due to weak legal institutions or under developed intermediaries. Increase in the external financing investment cost may occur due to association of agency cost problems with market imperfections. However, this study will not develop and test the hypothetical views of business groups.

Mitchell K. (1991) finds no support on the firm choice to match their asset maturities with maturity of debt issues. In a similar on debt issues, Guedes and Opler (1994) argue that high grade firms with large investment issue short-term debt. Diamond's (1991a) predicted that active participant’s part in short-term credit markets are taken by the higher-rated firms.

Auerbach & Alan (1979) also argues that growth rate of sales and leverage are inversely proportion because the interest payment of tax deductibility is less valuable to the larger or fast growing firms. The firm's annual sales growth rate in total assets was used as a growth rate of proxy.

Asset maturity is an important factor for corporate borrowing and plays stable role to predict the debt maturity of a firm. Myers, S.C., Brealey R. & Schaefer S. (1977) argued that long-term assets of firm can support to gain more long-term debt. In contrast, Titman, Sheridan, & Wessels (1988) analyzed debt maturity on the basis of balance sheet and viewed the evidences that smaller firms rely on higher proportion of short-term debt with objective to minimize long-term debt flotation costs. Barclay, Michael J., Clifford W. & Smith Jr. (1995) both addressed that smaller firms more likely with growth opportunities rely on a smaller proportion of debt that would exceeds 3 years. Myers, Stewart C. (1977) view on these evidences was that debt maturity is used by firms to control interest conflicts between debt and equity holders.

The preceding papers provided useful approaches for firms’ debt maturity choices; hence the measure had various limitations. First, the term-to-maturity in the corporate borrowing provide information just about incremental financing choices. The debt maturity average of the firm’s existing liabilities test relate to the terms-to-maturity of debt issues to balance sheet variables such as asset maturity or return on assets (Stohs & Mauer C, 1996).

Myers, S.C., Brealey R. & Schaefer S. (1977) defined the borrowing decisions of firms by using two indicators for growth: sales growth and growth of firm total assets. Examined the behavior of firm borrowing decision and concluded that; to prevent the agency cost of long term debt, most of the firms proffer short term debt decisions instead of long term debt. While Froot, Kenneth A., David S, and Stein C. (1993), Lucas, Deborah, & Robert McDonald (1990), and Kale, Jayant, and Thomas N. (1990)were examined the firm growth with three indicators of growth: sales growth, growth of firm total assets and growth of employed size of firm, and concluded that firm growth is independent of firm size. To study firms’ complete size distribution the several alternative forms of samples were used, so, the variables were leading each others, while the definite relationship for alternative form of samples were crucially assumed and it was derived that firm growth decreases with all three indicators for agency cost of long-term debt financing, hence the sales growth were certain.

Loughran, Tim, & Ritter J. (1995) accentuated the importance of firm growth, debt financing decision and changes in market structure. Mansfield addressed that debt financing is better when growth opportunities of firm were available and demanded, so the profitability of firm is certain and debt financing were benefited the tax advantage of firm.

DeAngelo H. & Masulis R. (1980) were examined the financing decision of firm and shown that firm value was being affected by the financing decisions of the firm, if the firm has to avail certain growth opportunities, the debt financing decisions were provided an effective tax advantage and resulted to decline in non-debt tax shields. Firm financing decision except debt financing resulted without tax shield beneficiaries, debt interest and principle payment were excluded from earnings of firm before tax applied and include net short term losses in taxable income and then the corporate taxes were be applied over taxable income. Hence it was addressed that the profitability of firm and the proportion of profitability over assets was affected by the corporate tax.

Gan J. (2007) addressed to normalizing the loan payment balances of prior debts and lending decisions. It was explained that the payment of debts balances loan slowly and present value of generated profit were exceeded the present value of total payment which were gradually paid. It has also an impact over firm capital and the proportion of debt over capital, the ratio of firm capital reduced with the excess of debt. Firm health with proportion of debt to capital were explained that healthy capital showed both from the borrowers willingness to repay gradually loan payment, and lenders willingness to lend. Debt financing and loan payments has also an impact over firm net profitability and the proportion of net earnings over firm total assets or return on assets, it must be paid even in bed time of firm, so well, it reduces the firm profitability and return on assets. The proportionate of earning over total assets showed the efficiency of firm that how well the firm is utilizing its assets to bear the cost of financing. Return on assets and prior debt to capital worth were used by means of lenders amount implicitly measure the worthiness of firm capital. Dedoussis E. & Afroditi P. (2010) argued the problems with characteristics of a firm such as assets value or growth opportunities were communicated inability of firm to outside lenders, so that investment decisions were affected by net worth of firm if the discrepancy exists between firm internal and external financing.

Hayashi F.(1982) explained that marginal profitability was covered by firms to expanding the business and sales of firm with bearing moderate changes of expenditures. This expansion were done by corporations with various financing decisions, it was suggested that the debt financing is better to avail if the market was shown under green signal demand, if the market demand were not shown so firm prevent the debt financing because of interest payment which must be paid even in bad time of cash flow.

Hadlock C.J (1998) assumed that backers are indecisive about the factual value of firm’s assets, so expectations were formed that are based on the investment amount that firm requests to carry out. If the firm requested for the maximum amount subsequently the investors were not capable to discriminate between a firm with large resources or low resources. So the large assets of firm with low claims send a green signal to investor to putting money for debt investors. While it send the signal to equity provider to cutting the amount of investment if the money is required for new project establishment because it shorten its net earnings as well as the earning of shareholders.



3.1 Method of Data Collection

Data was selected from the website of Karachi Stock Exchange KSE-100 Index as Balance Sheet Analysis of Joint Stock Companies given by State Bank of Pakistan in publication listed on the KSE (2005-2009). The period of study covers five years, 2005-09. The opted sample size of all cement sector firms was taken from KSE 100 Index and the firms whose data were not available in the sample year of 2005-09 were excluded from the study. The objective behind the insertion of the firms in the sample is that the objective of debt financing of the cement firms significantly rely over sales growth or not.

The major issue of data availability was faced in this research. The source of secondary data was adopted for the sampled data collection of this research study. In accordance to research studies limitations three firms of cement sector were excluded from the study because two of the firms were newly listed and introduced in the Pakistani market and third were delisted from the KSE-100 Index during the sample years.

Both of the theoretical and empirical aspects regarding the sales growth and debt financing were analyzed in this research. The external data sources were used to cope up the purpose of collection of data, such that general business publications, State Bank of Pakistan, journals and articles, annual reports, internet and books were used. The data required for study was completely dependent over the published data sources, such as the published data sources listed above.

3.2 Sample Size

A sample of all cement sector firms listed over KSE-100 Index was selected for study. From the sample firms whose data were not available in the sample year of 2005-20009 were excluded from the study. The impact of sales growth of the firms, which were listed on the KSE-100 Index, on the corporate debt was analyzed on the basis of the selected sample firms.

3.3 Research Model Developed

There are various determinants of corporate debts which affect the debt financing decision of the firms. This research study has analyzed the impact of sales growth on corporate debt. The sales growth was measured with two variables one is directly change of current year sales whit respect to last year sales, second the level of inventory held by firm. The short term debts were used as a major dilemma for firm’s to face debt claims in swift time. The developed model was a linear model and specifications are provided below:

CD = a0 + a1 SG + a2IH + є


CD= corporate debt was measured as the change of short-term debt with respect to last year debt.

SG= sales growth of firm with respect to last year sales of the firm.

IH= inventory held by firm during the year.

є = the error term

3.4 Statistical Technique

To examine the impact of sales growth on corporate borrowing the multiple linear regression analysis (MLR) as a statistical technique was used for this research of the selected firms; Statistical Package for the Social Sciences (SPSS) was used for the examination of the secondary data.

Multiple Linear Regression Analysis technique was used for the prediction of impact of the sales growth with growth of sales and inventory held by firm on corporate borrowing decision especially on short term financing. The identified technique was used to examine the impact of the different studied independent variables (sales growth and inventory held listed in the previous chapters) on the dependent variable i.e., Corporate Borrowing (short-term financing discussed in the previous chapter).

According to the characteristic of the study and variable used in this study, the multiple linear regressions; a multivariate analysis was appropriate to used than univariate investigation. In such a way the referenced studies has also suggested and used the multivariate analysis technique.

It showed the intensity of the impact on corporate debt during year 2005-2009 on the basis of studied independent variables i.e. sales growth and inventory held by firm during the year.



The sample of all firms of cement industry listed on the Karachi Stock Exchange KSE 100 Index was taken; Multiple Regression Analysis (MLR) as a statistical technique was used for this research study. Research examined by using multivariate technique for the prediction of impact of the sales growth with growth of sales and inventory held by firm on corporate borrowing decision especially on short term financing. The identified technique was used to examine the impact of the studied independent variables (sales growth and inventory held listed in the previous chapters) on the dependent variable i.e., Corporate Borrowing (short-term financing discussed in the previous chapter). For the examination and the analysis of the data Statistical Package for the Social Sciences (SPSS) was used.

4.1 Findings and Interpretation of the results

Primarily, the regression technique in SPSS was applied on the collected data. The resulted output of the data showed that the data has no multicolinearity issue, while the normality issue has been found in the data, to resolve the normality issue of the data all the transformation techniques were used. By applying the transformation, the studied variable were found to be insignificant, so it was described that the data was truly collected and the data was highly volatile so the normality issue may ignore to predict the variable. As the multicolinearity issue was not in the data, hence, study initiates to analyses the results. The analysis and interpretation of the results was presented in the next section of this research.

Table 4.1: Model Summaryb



R Square

Adjusted R Square





Table 4.1 demonstrated summary of the regression model. The Adjusted R square of 51% in the above table showed that the both of the predictors of corporate borrowing combined together explained 51% variation in the dependent variable and the remaining variation was latent or unexplained predictors were not included in the model.

Table 4.2: ANOVAb


Sum of Squares


Mean Square

















The table 4.2 checked the significance of the linear regression model in such a way that the reliability of the data file regarding the applicability of the regression technique can be understood from the above table; however, ANOVA table was reliable test of checking the linear regression model’s ability to explain any variation in the dependent variable of corporate borrowing. This was perfectly obvious from the sig value of .000 that meant that the linear regression model was highly significant for the data collected for the research study conducted.

Table 4.3: Coefficientsa


Unstandardized Coefficients

Standardized Coefficients



Collinearity Statistics


Std. Error


























The table 4.3 is crucial table for the regression model of the study. The sig column of the table showed that all the variables of the study were significant and all independent variables of the hypotheses of this research study have significantly influential intensity over dependent variable of the study. The Sig column of the table shows that the unstandardized coefficients, column B, is zero or not; if the sig value is greater than or equal to .05, the column B is zero; and if the sig value is less than .05, the column B is not zero. This column B value showed that the per unit change in independent variable result in a change equal to the value of column B in the dependent variable. The collinearity statistics VIF column showed the existence of multicollinearity among the independent variables of the model. As all of the VIF values are less than 2 and this clarifies that the multicollinearity has fallen at the minimum acceptable level possible.

4.2 Hypotheses Assessment Summary

The hypothesis of the study was sales growth of the firm has significant impact on the corporate borrowing’ decision to finance in short-term credit market. The firm’s sales growth characteristics were variation in the sales of firm with respect to last year sales and the level of inventory hold by firm during the financing year. In this study each of the sales growth variable and inventory variable as firm’s sales growth characteristic for corporate borrowing were tested and concluded in the results.

TABLE 4.4 : Hypotheses Assessment Summary







There is a positive impact of sales growth on corporate borrowing.





There is a positive impact of inventory held on corporate borrowing.






5.1 Conclusion

Based on the results it is concluded for this research study that sales growth is significant in this research and has positive effect on corporate borrowing which where identifying the significance in Pakistani market. And the second variable of the study was also identifying the significance in Pakistani market and has intensity to impact over corporate borrowing. The results of this study were not matching with the referenced studies conducted by Guedes & Opler (1996), and these results were also showing the consistency with the study conducted Barclay, Michael J., Clifford W. & Smith Jr. (1995). The studied results varying because the study was conducted in various countries, so the firms, environments and circumstances of the countries usually differ to made financing decision accordingly.

5.2 Discussions

Firm sales opportunities played a vital role in defining the firm’s sales growth but these growth opportunities may vary over volatility in environmental growth of the countries, hence, this was not the case with the research study conducted by Opler (1996), because in his study the level of inventory held by the firm over the year were not playing a significant role. Variations in the corporate borrowing were not explained by the level of inventory held by firm over the year. While the sales growth of the firm concluded the same results with consistent to the research study of Olper et al. (1996).

5.3 Implications and Recommendations

This research study was limited to the cement sector firms listed on Karachi Stock Exchange of Pakistan only. The data taken from all firms of cement sector which were took through the firms whose data was available during the selected sample year 2005-2009. This research suggested that such type of research study should be carried out and analyses in other countries of the Asia as well, as to have inclusive idea about the impact of sales growth on corporate borrowing. Furthermore, the research study also suggested that other factors of the corporate borrowing discussed in the chapter one should be researched as to have perfect idea for the debt financing decisions of the firm. For instance, this research study can also be replicated efficiently in other developing countries.

5.4 Future Research

This research study may helped various management of the firm, investors and other research conductors in analyzing and observing the debt behavior and financing decision of the firms to achieve the sales growth opportunities of the firm. The students whose intention is to research on either debt financing behavior of the firm or to study the growth behavior of the firm with respect to debt can be benefited by this study. Furthermore, the cement sector will become advantageous from this study because the study clarifies the impact of sales growth of firm on corporate short term borrowing.

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