(Masulis, finance investment through borrowed capital; b) firms prefer

(Masulis, 1980) researcher tested the hypothesis by
classifying firms’ leverage ratios as being above or below their industry
average prior to announcing a new debt issue. Whether there is an effect on
market returns for shareholder tested by researcher and that there no
significant relationship available between firm’s debt level and that of its
industry concern to the market.

(Eriotis, 2002)They studied the
relationship between debt-to equity ratio and firm’s profitability; they have
taken some points into consideration the level of firms’ investment and the
degree of market power. Researcher used panel data for various industries, covering
the period 1995-96. By hypothesis testing Researcher found a strong negative
impact of the debt-to-equity ratio on firms? profitability. They got some
conclusions on the basis of data analysis are as a) firms which prefer to
finance their investment activities through self-finance are more profitable
than firms which finance investment through borrowed capital; b) firms prefer
competing with each other than cooperating; c) firms use their investment in
fixed assets as a strategic variable to affect profitability.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

(Padey, 2005)They provide new
insights into the way in which capital structure and market power and capital
structure and profitability are related. Researcher used Tobin’s Q to measure
Capital structure and market power. It shows a cubic relationship, due to the
complex interaction of market conditions, agency problems and bankruptcy costs.
Researcher found that the saucer-shaped relation between capital structure and
profitability, due to the interplay of agency costs, costs of external
financing and debt tax shield.

attempted to reconcile the two strands of literature that are Signaling theory
implies that leverage should be positively associated with expected future cash
flow and pecking order behavior reveal a negative simultaneous relationship
between cash flow and leverage. To overcome these theoretical and empirical
contradictions researcher develop a model which allows leverage and Cash flow.
They took a data for six industry and total 5936 observations for analysis and
they tested signaling theory and pecking order behavior.

found that the relevant signaling relationship is intertemporal in nature. Expected
future cash flow is associated with leverage positively this is given in the
signaling theory. On the other hand, they noted that pecking order behavior
focuses on the contemporaneous relationship between cash flow and leverage.
They found negative relationship  Researcher
given some suggestion that both pecking order behavior and signalling theory is
quite robust across the industries investigated, thus reconciliation of the
contrasting theoretical and empirical implications in the existing literature
is required.

(Richardson, 2006) Researcher examines
the extent of firm level over-investment of free cash flow. Researcher found
evidence that, consistent with agency cost explanations, over-investment is
concentrated in firms with the highest levels of free cash flow. Researcher
also  tested the association between
overinvestment and governance structure of firm. They concluded that presence
of activist investor appears painful over investment.

(Shawn M. Carraher, 2013) Researcher taken sample
of 312 small firms to examine the use of financial statements. Researcher
analyzes two factors (1) affect the use of financial statements and (2) owners’
comfort in interpreting financial statements. They found that owner comfort in
using financial statements to make decisions was inversely associated with
frequency of preparation and directly associated with level of revenues. They
also comment on whether the owner uses financial decisions when making
decisions was indirectly associated with education level and having the
statements prepared externally and directly associated with owner comfort
interpreting the information in financial statements.


statements show, among other things, the various outflows and inflows of cash
and profits as also the financial position of a firm. This is why they are very
important for financial analysis and planning. The Income Statement is one such
statement, which shows the firm’s income and expenses and the resulting profits
during a particular fiscal period. Various measures of profits, such as gross
profit, operating profit, earning before taxes, and the net income after taxes
are evident from Income Statement.

other important financial statements is Balance Sheet, which shows the firm’s
various liabilities and assets as on a particular date, generally the closing
day of a fiscal period. However, the balance sheet does not show the movement
of funds during a particular fiscal period. That is why these two statements
are often supplemented with a funds flow statement. Such a statement shows the
different sources of funds during a given period and how they are put to
different uses thus affecting the working capital of the firm. Apart from
funds-flow statement, a cash flow statement is often prepared as it shows the
changes in firm’s cash position. The sources and uses of funds are the sources
and uses of cash. Hence to make a feasible business plan entrepreneur have to
consider proposed financial statement and forecasting of its performance for at
least three or five years.