The business environment is highly dynamic and today’s organisations are striving hard to fulfil their goal of profitability. The fulfilment of profitability goals of the organisation depends largely on the financial decisions that re being taken by the companies (Rasiah, Tong and Kim, 2014). It has been highlighted by the recent researchers that capital structure decision is one of the most debatable issue in the context of firm’s profitability (Mistry, 2012). The early researchers on the issue have negated the importance of capital structure by stating that value of firm is independent of capital structure decision of the firm (Elsas, Flannery and Garfinkel, 2014). This view was found to be based on unrealistic assumption of perfect capital market which is exempted from corporate taxes and transaction cost. On the other hand, the number of researchers has worked on this issue and they have developed different theoretical concepts for recognising the value of capital structure of the firm (Öztekin, 2015).

There is evidence of conflicting views on the association of capital structure and profitability of the firm such that most of researchers have addressed that value can be maximised through tax savings by making high reliance on debt (Maina and Ishmail, 2014). Yet, it is mainly ignored that increased debt can also lead to financial distress and it in spite of adding value it might lead to reduction of value for the firm. This ability of capital structure to enhance both gains and losses for the firm is calling for investigation of this issue, as it has been termed as double edged sword and which side of this sword is sharper, is still under debate (Faccio and Xu, 2015). The automobile industry is highly capital intensive and capital structure decision are considered as substantially important for maximising the profitability level of firm (Mistry, 2012). Given this perspective, it has been considered important to understand the association of capital structure and profitability in automobile industry of UK.

1Literature Review

Capital structure refers to the firm’s choice about the mixture of sources that can be used for financing the operations of firms, including debt sources and equity sources. The success of debt equity proportion of the firm lies in the ability of firm to search for optimal capital structure that is the optimum level of capital contributes in maximisation of firm’s profitability (Rasiah, Tong and Kim, 2014). The research on capital structure is one of the significant area of research as researchers and practitioners are still struggling to define models for recognising optimal capital structure for the firm. The literature of capital structure is being supplemented by different theories on the subject that are successfully contributing in investigation of value of capital structure (Faccio and Xu, 2015). The initial theory of capital structure is termed as capital structure irrelevance theory that has provided that financial leverage of the firm cannot exert influence on market value of the firm (Ganguli, 2013). The theory was revised later by highlighting the benefits that could come from taxes. However, this theory was also criticised for it over emphasis on debt while ignoring any associated risk aspect (Kodongo, Mokoaleli-Mokoteli and Maina, 2015). The changes have been made in the theory of Modigliani and Miller with an aim of addressing the importance of capital structure along with addressing the possible risk associated with overemphasis on debt capital.

1.1Static tradeoff theory

The gaps in the theory of capital structure irrelevancy and over emphasis are being addressed in static trade off theory. The tradeoff theory has focused on cost of issuing debt and it has highlighted that attraction of target debt ratio lies in its ability to make good value for the firm (Elsas, Flannery and Garfinkel, 2014).  The combination of marginal value of payback with debt concerns is considered as important for generating value for the company. It has been highlighted by Al-Jafari and Al Samman (2015) that main benefit of debt based capital is the deductibility of tax of the interest payment. Along with this, it has also been mentioned that incorporation of debt based capital leads to minimisation of conflict of interest between managers and shareholders. It also helps in confining the free cash flow that is available to managers and thus contributes in lowering the difficulties that can be faced by firms (Robb and Robinson, 2014). The essence of this theory lies in the fact that it has addressed the aspects through which capital structure decision can be linked with the profitability and value of the firm (Zeitun and Tian, 2014). Along with favorable aspects of debt financing, the static trade-off theory has also addressed the aspect of financial distress that can be caused by debt financing, thus suggesting that firms needs to make careful decisions regarding capital restructuring.

1.2Agency Cost Theory

Agency cost is linked with the conflict of interest between managers and shareholders and it rises as the consequence of separation of ownership between owners and management. The most substantial cause of conflict between managers and shareholders is free cash flow (Ganguli, 2013). In order to cope with issue, the advocates of debt financing has considered debt as defense tool for conflict minimisation and for ensuring that managers readily offer preference to creation of wealth for equity holders (Graham, Leary and Roberts, 2015). Thus high ratio of debt to equity is considered as important for securing resources of firm and for gaining higher value based on higher level of profitability. However, some researchers have also highlighted that agency theory has overlooked cost of bankruptcy and financial distress caused by debt financing and thus a trade-off is needed to be made by the organisations in until the marginal equity cost becomes equal to the margin debt cost incurred for yielding optimal capital structure (Faccio and Xu, 2015).

1.3Pecking Order Theory

The Pecking Order Theory is also an important endeavour of capital structure research which asserts that there exist hierarchy of financial decisions within organisations and most suitable option is to avail retained amount prior to issuance of debt securities (Robb and Robinson, 2014). According to this theory, internal finances are most profitable as they do not incur any additional cost and external funds should be used only when internal financing sources are insufficient to meet the needs of firm (Al-Jafari and Al Samman, 2015). The theory has further posited that internal stakeholders of the firm have more knowledge about firms’ conditions and any growth opportunities and thus in order to retain success in long run, the companies should avoid to make public disclosures of this information for attracting external finances (Kodongo, Mokoaleli-Mokoteli and Maina, 2015). Therefore, it can be considered that Peck Order Theory has not focused readily on positives of debt financing.

1.4Empirical Evidences of Association of Capital Structure and Profitability

There exist evidences from large number of empirical studies that have been carried out on capital structure and firm’s profitability in different countries and industries across the globe. It has been highlighted in the study of Zeitun and Tian (2014) that debt ratio of firm has overall negative association with performance measures of the firm. Their results have also revealed the perspective that size of the firm is positively linked with the growth and profitability of the firm regardless of its debt financing ratio. In contrary to this, the study of Kyereboah-Coleman (2007) has revealed opposite results and found that total debt ratio of the firm has significant positive linkage with profitability of the firm. In similar way, the research of El-Sayed Ebaid (2009) has highlighted distinction of short and long term debt and offered that short term debt is more profitable for the firms as it offers high return on equity in contrast to long term debt. The results of another study have highlighted that there is negative association of long term debt and return on equity and positive association of overall debt ratio with return on equity of the firm (Abor, 2005).

Moreover, the research has been carried out on capital structure in India Automobile industry and it has been recognised that there prevails significant and positive relationship between debt to equity ratio, size and asset turnover ratio of the firm (Mistry, 2012). It is notable that the empirical evidences have highlighted mixed findings about association of capital structure and firm’s profitability. However, the most of evidences are in inclined towards positive association of these variables and present study is also expecting positive association of capital structure and profitability of automobile firms.

2Methodology

2.1Research Philosophy

Philosophy of research is based on epistemological position of the research, which can be defined as the theory of knowledge, constitution of knowledge and ways for interpretation of that specific knowledge. In the epistemology position of research, the two discrepancies can be made linked to varying types of philosophies, including interpretivist and positivist. Interpretivist philosophy of the research posits that there exist multiple realities and knowledge in socially constructed which offers an opportunity to researcher for deriving multiple explanation of any given phenomenon (Patton, 2005). On the other hand, the positivist research philosophy asserts that there is single reality of any research issue based on the externality of the world (Kumar and Phrommathed, 2005). The positivist research philosophy allows the researcher to carry out an unbiased research apart from the personal views or beliefs of the researcher.

The underlying research study has chosen to adopt positivist research philosophy which will allow the researcher to rely on structural approach of research. The structural approach will enable to construct hypotheses and then to adopt a most suitable research methodology for investigation of those hypothesised relationships (Cooper, Hedges and Valentine, 2009). There are many reasons for adopting positivist research philosophy. Firstly, the research at hand is aimed at investigating the association of capital structure with profitability of automobile industry, which is an objective phenomenon and a specific interpretation of this issue is expected that could either be in the form of positive association or negative association. In order to clearly evaluate the positive or negative association of this research issue, the approach of positivism is most appropriate. Secondly, as offered by Scandura and Williams (2000) the positivist research philosophy allows the researcher to remain detached from the study and to maintain a separate and detached position from the research. It is an effective way of remaining neutral and clearly recognising the difference between logical reality and emotions of the researcher (Kumar and Phrommathed, 2005). Thus, by relying on this approach, the researcher in present study will be able to maintain a clear stance of the logical association between capital structure and profitability of the firm. The researcher will successfully maintain objective stance and by maintaining reliance on rational and logical connection between underlying variables, more valid findings of the research will be generated that will be successfully implied in wider setting, beyond the automotive industry.

It is also notable that in order to successfully generate valid results based on positivist philosophy of research, the statistical and mathematical approaches of research are central to this approach (Marczyk, DeMatteo and Festinger, 2005). It will foster the researcher to make time and context free generalisation about the association of capital structure and profitability of automobile companies. Based on the reasons for maintaining reliance on positivist philosophy of the research and its ability to generate fact based findings, this philosophy can be considered as most suitable for the underlying research issue.

2.2Research Approach

There are various kinds of available research approaches, which can be adopted by the researcher with an aim of investigating any underlying research phenomenon. The qualitative and quantitative research approaches are most commonly used and in some cases they can be combined in single research, leading to adoption of mixed methodology of research. The qualitative approach of research is utilised for carrying out an in-depth analysis of any specific research issue and is used in compliance with interpretivist research paradigm (Newman and Benz, 1998). The qualitative method of research allows to collect data through interviews, observation and focused group. The specification of qualitative research to go deeper in specific research issue makes it appropriate for using it as a preliminary study for opening ends for quantitative study (Patton, 2005). On the other hand, the quantitative research approach allows to obtain data in the form of facts and figures and it is used for research issues that have underlying theories which provide solid ground for the research (Newman and Benz, 1998).

The present research study will rely on quantitative research method and numerical data will be obtained about the profitability of the automobile firms based on their capital structuring decision making. The quantitative approach of research will be adopted for number of reasons. Firstly, the quantitative method of research is useful for finding the causal connection of the variables of interest. As highlighted by Neuman (2002) the causation can be best studied by relying on quantitative method of research and it is highly useful for generating valid findings about the issue that can be generalised for the wider population.

Along with this, it has been asserted by Dooley (2001) that there should be compliance of research questions with adopted research methods. As indicted from the review of prior related studies, most of studies on capital structure and profitability have relied on quantitative methods of the research and offered that this methodology is most suitable for evaluating the causal association of these two variables. Therefore, the suitability of research questions with the research approach is evident in the case of current study.

In addition to it, the most significant aspect of quantitative research is that it is aligned with positivist research approach and it enables the researcher to maintain objectivity in the research (Kumar and Phrommathed, 2005). It has been highlighted in the preceding section that research is aimed at using positivist paradigm of research and thus quantitative research will be most appropriate for this purpose. The quantitative methodology will allow the research to maintain a separate position from the research (Kothari, 2004) and the association of capital structure and profitability highlighted in this study will be free from any personal biases of the researcher. Finally, the quantitative data allows the researcher to capture a snapshot of the population either in numerical form by offering descriptive view of data or in the form of visual representation of data (Fixsen et al., 2005). Thus, more comprehensive and clear understanding of the research issue can be obtained and it will be most suitable method for the purpose of present research study.

3Data Sources

In terms of collection of data, there are two most widely used methods, including primary and secondary method. In primary data collection technique, the fresh hand data is obtained about the contemporary research issue at hand and recency aspect of data is high (Bryman and Bell, 2015). On the other hand, the secondary data has already been collected some separate entity for research purposes and it can be implied for drawing causal inferences about the research issue at hand (Cooper, Hedges and Valentine, 2009).

The underlying research study will make reliance on secondary data and there are number of benefits that will serve as rational for choosing secondary data technique. The secondary data can be easily obtained and it requires minimum cost and time (Creswell, 2002). In addition to it, in secondary research the access to large pool of information is evident which might not be the case in primary research, where it is much difficult to obtain data from large number of respondents (Marczyk, DeMatteo and Festinger, 2005). In similar way, the secondary data which is obtained from published sources is highly valid and reliable and it act as the way of generating highly valid results about any underlying research issue (Kumar and Phrommathed, 2005). Based on the benefits of secondary data, it can be mentioned that this method is highly appropriate for obtaining data for investigating the association of capital structure and profitability of automobile industry.

The secondary data will mainly be obtained from published reports of the automobile companies and their profitability figures will be studied based on their capital structuring decision making. Along with this, information will also be obtained from Journal articles and research sources which have recognised association of capital structure with profitability of automobile sector. These sources are considered as most valid and empirical information offered by these sources is highly valid, thus making it possible to generate valid and generalisable findings about the research issue.

4Project Plan and Timescale

PLANNED ACTIVITIES	JUN 2017	JUL 2017	AUG 2017	SEP 2017	OCT 2017	NOV 2017
Critical Analysis of Literature
Data Collection
Data Analysis
Results
Interpretation
Final Write up
Dissertation Submission

 

5Any Unforeseen Problems

There could be some issues in the overall span of the study that are needed to be considered by the research proactively with an aim of making necessary consideration in timely manner. Firstly, it is important to consider that secondary data might lose sight of the recency aspect of the research that is highly important for drawing most valid causal inferences about research. This aspect will be addressed by taking data only from most recent sources, such as published reports and published research papers will be taken only from recent years and thus this unforeseen issue will be minimised to the possible extent. Along with this, threat of reliability of secondary information is also evident in secondary research and this issue can affect the overall reliability of the results. In order to cope with this issue, it will be carefully considered that only highly reliable sources of information are being chosen and data is investigated for reliability prior to its usage in the study. Other issues could be regarding time or cost of the study and these can be catered well by following the given timeframe of the study.

 

 

6References

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