Fall 2017 - RTS720 - MS160200073

IMPACT OF FREE CASH FLOW ON PERFORMANCE OF
TEXTILE INDUSTRY IN PAKISTAN: A TEST OF FREE CASH

FLOW HYPOTHESIS
Name: Zohaib Fareed
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Student ID# MS-160200073
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A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF
REQUIREMENTS FOR THE DEGREE
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MASTER OF SCIENCE
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IN
BUSINESS ADMINISTRATION (FINANCE)
VIRTUAL UNIVERISTY OF PAKISTAN
2018
IMPACT OF FREE CASH FLOW ON PERFORMANCE OF
TEXTILE INDUSTRY IN PAKISTAN: A TEST OF FREE CASH
FLOW HYPOTHESIS
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Name: Zohaib Fareed
Student ID# MS-160200073
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A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF

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REQUIREMENTS FOR THE DEGREE

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OF
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MASTER OF SCIENCE
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IN
BUSINESS ADMINISTRATION (FINANCE)
VIRTUAL UNIVERISTY OF PAKISTAN
2018
DEDICATION
To,
The Controller of Examinations,

Virtual University of Pakistan,
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It is to certify that the contents and form of the thesis, submitted by Zohaib Fareed , Student ID
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MS-160200073 have been found satisfactory and recommend that it be processed for the
evaluation by the External Examiner(s) for the award of the degree.
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SUPERVISOR _______________________
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HOD _______________________
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DEDICATION
DEDICATION
I would like to dedicate this study to my parents, Fareed Ahmed and Nasra Fareed, my wife,
Mrs. Zohaib Fareed, my daughter, Rumaisa Binte Zohaib who encouraged me and provide
support for this study.
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ACKNOWLEDGMENTS
ACKNOWLEDGMENTS
All praises to Almighty Allah the most gracious and the most merciful, for His blessings and
giving me the strength to complete this work. I would like to express thanks to my supervisor
Miss Aisha Ismail for her professional guidance, support and her supervision throughout this
study. Thanks to entire academic staff of Department of Management Science, Virtual University
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of Pakistan. Also thanks to my family, my parents and my brothers for their support during this
study.
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TABLE OF CONTENTS
TABLE OF CONTENTS
DEDICATION.......................................................................................................................................................I
ACKNOWLEDGMENTS ....................................................................................................................................II
TABLE OF CONTENTS ....................................................................................................................................III
LIST OF TABLES................................................................................................................................................V
LIST OF FIGURES.............................................................................................................................................VI
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LIST OF ABBREVIATIONS.............................................................................................................................VII
ABSTRACT.......................................................................................................................................................VIII
1) INTRODUCTION ............................................................................................................................................. 1
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1.1) BACKGROUND: .............................................................................................................................................3
1.2) RESEARCH PROBLEM: ...............................................................................................................................3
1.3) RESEARCH QUESTIONS: ............................................................................................................................4
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1.4) SIGNIFICANCE OF THE STUDY: ...............................................................................................................4
1.5) RESEARCH OBJECTIVE: ............................................................................................................................4
1.5) THESIS STRUCTURE:...................................................................................................................................5
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2) LITERATURE REVIEW .................................................................................................................................. 6
2.1) INTRODUCTION: ..........................................................................................................................................6
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2.2) RESEARCH HYPOTHESIS:........................................................................................................................10
2.3) THEORETICAL FRAMEWORK: ..............................................................................................................10
2.4) THEORETICAL MODEL:...........................................................................................................................11
3) METHODOLOGY........................................................................................................................................... 11
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3.2) RESEARCH PARADIGM:...........................................................................................................................12

3.3) NATURE OF RESEARCH STUDY: ...........................................................................................................12
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3.4) POPULATION AND SAMPLE FRAME:....................................................................................................12

3.5) SAMPLE SIZE AND SAMPLING TECHNIQUE: .....................................................................................12
3.6) DATA COLLECTION SOURCES: .............................................................................................................13
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3.7) DATA COLLECTION TOOLS: ..................................................................................................................13

3.8) DEFINITION & MEASUREMENT OF VARIABLES: ............................................................................13
3.8.1) Dependent Variable: ................................................................................................................................13
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3.8.2) Independent Variable:-............................................................................................................................13

3.8.3) Control Variables:- ..................................................................................................................................14
3.9) DATA PROCESSING, ANALYSIS TECHNIQUES AND INTERPRETATION:..................................16
4) RESULTS: ...................................................................................................................................................... 17
4.1) DESCRIPTIVE STATISTICS: .....................................................................................................................17
4.1.1) INDUSTRY:.............................................................................................................................................18
4.1.2) SUBSECTORS: .......................................................................................................................................19
............................................................................................................................................................................ 23
............................................................................................................................................................................ 24
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TABLE OF CONTENTS
4.2) INDUSTRY RESULTS:.................................................................................................................................25

4.2.1) Correlation Analysis:...............................................................................................................................25
4.2.2) Regression Analysis:................................................................................................................................26
4.2.3) Diagnostic Tests:......................................................................................................................................27
4.2.4) Fixed Effect Regression Results: ............................................................................................................29
4.3) SUBSECTORS RESULTS: ...........................................................................................................................31
4.3.1) Correlation Analysis:...............................................................................................................................31
4.3.2) Regression Analysis:................................................................................................................................32
4.3.3) Diagnostic Tests:......................................................................................................................................33
4.3.4) LSDV Regression Results of Sub-sectors: ..............................................................................................34
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5) DISCUSSION ................................................................................................................................................. 36
6) SUMMARY / CONCLUSION: ........................................................................................................................ 39
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6.1) RECOMMENDATIONS:..............................................................................................................................40
6.2) LIMITATIONS:.............................................................................................................................................40
6.3) FURUTRE RESEARCH: ..............................................................................................................................40
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7) REFERENCES: .............................................................................................................................................. 41
APPENDIX -A: LIST OF SAMPLE COMPANIES ............................................................................................ 45
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APPENDIX- B: REGRESSION RESULTS WITH RELATIVE SIZE OF FIRM ............................................... 47
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LIST OF TABLES
LIST OF TABLES
Table 3.8.1 Variable and Measures………………………………………………………... 15

Table 3.9.1 Fixed Effect & Random Effect Models………………………………………..17
Table 4.1.1 Descriptive Statistics of Textile Industry of Pakistan…….………………… 18
Table 4.1.2 Descriptive Statistics of Composite Sector………..………..………………....19
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Table 4.1.3 Descriptive Statistics of Spinning Sector………....………..………………....20
Table 4.1.4 Descriptive Statistics of Weaving Sector………………..…..………………...21
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Table 4.2.1 Correlation Matrix of Textile Industry…...…………………………………...26
Table 4.2.2 Regression Results of Textile Industry of Pakistan…………….…………….26
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Table 4.2.3.1 Variance Inflation Factor (VIF) Test (Industry)..……..……………………..28
Table 4.2.3.2 Results of Diagnostic Test………….………………………………………….29
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Table 4.2.4 Fixed Effect Panel Regression Results of Textile Industry of Pakistan……..30
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Table 4.3.1 Correlation Matrix of Subsectors……………………………………………...31
Table 4.3.2 Regression Results of Subsectors of Textile Industry in Pakistan…………..32
Table 4.3.3 Variance Inflation Factor (VIF) Test (Subsectors).…..………………………33
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Table 4.3.4 LSDV Regression Results of Subsectors of Textile Industry in Pakistan…..34

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LIST OF FIGURES
LIST OF FIGURES
Figure 4.1.1 Variable Trends in Textile Industry of Pakistan from 2012 to 2017………. 23
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LIST OF ABBREVIATIONS
LIST OF ABBREVIATIONS
FCF = Free Cash Flow
FG = Firm Growth
FL = Financial Leverage
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FS = Firm Size
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NPV = Net Present Value
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PSX = Pakistan Stock Exchange
ROA = Return on Assets IV

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RSF = Relative Size of Firm
VIF = Variance Inflation Factor

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ABSTRACT
ABSTRACT
This study examines the impact of free cash flow on performance of textile industry of
Pakistan, in the light of free cash flow hypothesis stated by Jensen (1986). A sample of sixty
seven (67) textile companies listed at Pakistan Stock Exchange (PSX) has been used for a period
of six years from 2012 to 2017. Return on Assets (ROA) is used as a measure of Performance, a
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dependent variable. Free Cash Flow (FCF) is an independent variable of the study; three control
variables i.e. Financial Leverage, Firm Size and Firm Growth are also included in the analysis.
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The findings of the study are based on regression analysis of entire industry and its subsectors
(i.e. composite, spinning and weaving). The results show significant positive relationship
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between free cash flow and performance and significant negative relationship between financial
leverage and performance in entire textile industry and in its subsectors as well. Findings of the
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study also have implications for various stakeholders of the industry.
Keywords: Free cash flow, Performance, Free cash flow hypothesis, Firm size, Growth, Textile
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1) INTRODUCTION
1) INTRODUCTION
Never take your eyes off the cash flow because it's the life blood of business
(Richard Branson, Founder of Virgin Group).
As in the afore mentioned quote, cash is the life blood of business. It is common factor of
all business organizations, whether it is a small proprietorship or a large corporation (Awan,
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Shahid, Hassan, & Ahmad, 2014). Many profit earning firms go bankrupt due to shortage of cash
that is generated from operating, investing and financing activities of the companies. Jensen
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(1986) defined free cash flow as cash available after investment in projects with positive Net
Present Value (NPV). He claimed it as a measure of firm performance. Dechow and Ge (2006)
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stated that cash flow from operations when combined with cash flow from investing activities is
known as free cash flow. Free cash flow is also defined as cash remaining after paying all
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operating obligations and capital expenditures. Free cash flow is used for the payment of
dividend, for expansion of the businesses, to purchase the inventories and for the induction of
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new products into existing product mix. Free cash flow is important for both shareholders and
managers, because it allows the firm to avail opportunities which increase shareholders’ assets
(Heydari, Mirzaeifar, & Javadghayed, 2014), while the managers use free cash flow to increase
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their control on firm’s resources (Jensen, 1986). Audretsch and Elston (2002) argued that the
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availability of many growth opportunities combined with high investment-cash flow sensitivity
is considered to be a symptom of less investment, Heydari et al. (2014) also supported this
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argument and stated that the excess accumulation of free cash flow may signal the management’s
reduced ability of market supervision because it shows lack of investment habits of the
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management, keeping highly risky liquid assets and wastage of organizational resources. Hence,
if free cash flow is not duly utilized then the profit of firm will decrease.
Profit is the ultimate target of any business organization, it is a measure of firm success
(Zubairi, 2010) and shows that how firm utilizes its resources. Increased profitability may
determine working area of financial strategy and required improvement(s) in that area. Any news
regarding increased profit may increase shares’ price accordingly (Wen, 2017). Profitability of
firm is also important for business expansion, ease in the borrowing and repayment of money, to
attract investors and hiring more employees (Johnson). Generally, profit has two types; first is
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1) INTRODUCTION
Accounting Profit i.e. simple subtraction of all expenses from revenues. Second is Economic
Profit, which is calculated by deducting opportunity cost of the inputs used from revenues. In
this study, accounting profit is focused.
Jensen (1986) highlighted the relationship between free cash flow and performance and
stated that there is negative relationship between free cash flow and performance of firm due to
agency relationship of shareholders (principal) and managers (agent). He further argued that the
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increase in debt reduces free cash in the hand of managers (Kadioglu & Yilmaz, 2017), which
leads to increase in firm performance by decreasing agency cost. Studies by (Heydari et al.,
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2014; Kadioglu, Kilic, & Yilmaz, 2017; K. Park & Jang, 2013; Parsian & Koloukhi, 2014; Wu,
2004) confirmed the above stated hypothesis, while (Ambreen & Aftab, 2016; Kamran, Zhao, &
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Ambreen, 2017; Wang, 2010) found results contrary to the free cash flow hypothesis of (Jensen,
1986). In sum, free cash flow generates through efficient utilization of operating activities, if not
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used properly, the performance of firm will be decreased.
This study investigated the relationship between free cash flow and performance of firms
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in Textile sector of Pakistan, the largest manufacturing sector. This sector contributes
approximately one-fourth of industrial value-added, employed about 40% of industrial labour
force, consumes about 40% of banking credit to manufacturing sector, accounts for 8% of GDP
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(Ministry of Textile Industry, 2015), and has an average share about 57% in total exports of
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Pakistan (Economic Adviser’s Wing, 2017). In 1947, Pakistan had only 6 spinning factories, but
now 1,221 ginning units, 442 spinning units, 124 large spinning units and 425 small spinning
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units are working (Shah, Syed, & Shaikh, 2014). Pakistan is located in a geographical hub of
worldwide textile producers. China, India, Vietnam and Bangladesh are the main competitors of
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Pakistan in foreign market. Presently, in Pakistan Stock Exchange (PSX), 149 textile companies
are trading, divided in subsectors of 53 composite, 82 spinning and 14 weaving companies.
Unfortunately, performance of textile sector of Pakistan is decreasing day by day due to
increasing cost of raw materials and wages, increasing cost of replacement of plant and
machinery and energy crises. These problems decrease performance and create cash flow
problems in this sector. In order to explore whether free cash flow is affecting the performance
of the firms in textile sector in positive way or negative way; this study is covered the research
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1) INTRODUCTION
gap regarding relationship between free cash flow and subsector wise performance of textile
industry of Pakistan, in perspective of free cash flow hypothesis stated by (Jensen, 1986).
1.1) BACKGROUND:
Berle and Means (1932) introduced agency problem and stated that the agency cost is
incurred as a result of the separation of ownership and management. Jensen and Meckling (1976)
stated that the agency relationship is a contract between the owners (shareholders) and agents
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(managers) to perform a particular task(s). To fulfill that task(s), they (shareholders) have to give
some authority to the managers, which create conflict of interest, and each party tries to
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maximize their own benefits. Therefore; this conflict of interest is notably considered in agency
relationship when firm generates much free cash flow; shareholders want to use free cash for the
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payment of dividend while manager want to use this free cash in investments even in negative
NPV projects (Richardson, 2006), for incremental control on firms’ resources. Therefore,
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managers’ decisions regarding use of free cash directly impacts the firm performance; the main
concern of all stakeholders.
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Jensen (1986) used agency theory to present free cash flow hypothesis in which he states
that managers prefer to carry free cash flow that they can easily use for their own interest, such
as enhancement of their remunerations, perks and facilities (Wu, 2004) or to invest in negative
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NPV projects (Jensen, 1986) that can negatively impact the performance of firm (Kadioglu et al.,
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2017), and ultimately affect the dividend. Since the shareholders have to pay costs to keep their
interest in line with the interest of managers (Heydari et al., 2014), that is why this cost is known
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as agency cost (Jensen & Meckling, 1976). In other words, agency cost of free cash flow is the
investments in negative value projects, which decreases firm’s performance.
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1.2) RESEARCH PROBLEM:

Textile sector, being the largest manufacturing sector of Pakistan, is facing problems of
increasing cost of raw materials and wages, increasing cost of replacement of plant and
machinery and energy crises. These problems decrease performance and may create cash flow
problems in this sector. During last three years, almost 30 percent of textile units have been shut
down, more than 10,000 labors are unemployed and the annual exports of textile products have
been decreased by $3 billion (Afzal, 2017). Considering these problems in textile industry of
Pakistan, there is a need to analyze how free cash flow problem is affecting performance of this
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1) INTRODUCTION
sector and specifically how this relationship is affecting the performance of sub-sector of textile
industry. It is also important to identify the sub-sector where this cash flow problem is more
serious and creating problem for overall textile industry.
In Pakistan, only (Ambreen & Aftab, 2016; Kamran et al., 2017) studied the relationship
between free cash flow and performance in perspective of whole manufacturing sector of
Pakistan, but the findings of these studies may not be applied to specific sector. This study is not
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only investigated the free cash flow and performance relationship but the findings of this study
are also specifically applied to subsectors of textile industry of Pakistan, an interesting feature of
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this study.
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1.3) RESEARCH QUESTIONS:
In Pakistan very few studies test the free cash flow hypothesis of (Jensen, 1986);
therefore this research provides the answer of following research question in perspective of sub
sector of textile industry of Pakistan.
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1) Is there any significant relationship between free cash flow and firm performance?
1.4) SIGNIFICANCE OF THE STUDY:

This study provides insight about free cash flow and performance of the textile sector of
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Pakistan to the investors, while they investing and managing portfolios for increasing their
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returns. This study is helpful to the business and investment consultants to provide concrete and
improved suggestions to their clients regarding investments in textile sector of Pakistan.
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Furthermore, this study is also beneficial for the managers of the textile firms of Pakistan to
manage free cash flow and performance. Since this study adds knowledge on the topic of
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relationship between free cash flow and performance of the textile sector of Pakistan, therefore,
this study is also beneficial to the researchers and academicians for further research on this topic
with different variables and for different time period.
1.5) RESEARCH OBJECTIVE:

The aim of this study is:
To identify impact of free cash flow on performance of textile industry in Pakistan.
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1.5) THESIS STRUCTURE:
The structure of this study is in the following order; chapter two deals with the literature
review, research hypothesis, theoretical framework and theoretical model; chapter three deals
with the methodology of this research and includes type of research, research paradigm, nature of
research study, population and sampling frame, sample size and sampling technique, data
collection sources, data collection tools, definition and measurement of variables and data
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processing, analysis techniques and interpretation. Chapter four presents results of the study, in
this section descriptive statistics, correlation analysis, results of diagnostic tests and regression
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analysis; for entire industry and its subsectors, have been presented. Chapter five discusses
results of this study and the chapter six deals with conclusion, recommendations, limitations and
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suggestions for future study
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2) LITERATURE REVIEW
This chapter presents the detailed review of earlier studies on the topic of free cash flow
hypothesis of Jensen (1986), hypothesis of this study, theoretical framework and theoretical
model.
2.1) INTRODUCTION:
The term free cash flow is not very old in finance literature, it introduced in the mid of
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1980s and become the popular amongst business owners, business consultants, investors and
financial managers. Researchers of 20thcentury tried to attract the attention of investors,
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managers and finance professionals towards this important topic. As objective of this study is to
investigate the relationship between free cash flow and performance in subsectors of textile
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industry of Pakistan in the light of free cash flow hypothesis, therefore, this literature review is
divided into the following sections:-
i. Free Cash Flow Hypothesis

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ii. Studies Agreeing With The Free Cash Flow Hypothesis
iii. Studies Contrary To The Free Cash Flow Hypothesis
i) Free Cash Flow Hypothesis:
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Jensen (1986) introduced the term Free Cash Flow and define it as the operating cash in
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the hand of managers after making investments in positive NPV projects. He stated that excess
free cash flow will cause to increase an agency cost due to conflict of interest between
shareholders and managers. Managers, for increase in their control on firm affairs, they invest
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free cash flow in negative NPV projects (Jensen, 1986; Richardson, 2006). Therefore, he
identified the negative relationship between free cash flow and firm performance. On the other
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hand he claimed that the leverage can play an important role to mitigate the agency cost because
incremental finance cost reduces the operating profit, resulting in, excess free cash flow for
negative NPV projects will not generate, and therefore he identified the positive correlation
between the leverage and firm performance.
ii) Studies Agreeing with the Free Cash Flow Hypothesis:
Khan, Kaleem, and Nazir (2012) examined the mitigation of agency cost of free cash
flow through leverage in manufacturing sector of Pakistan. For this purpose they examined panel
data of 54 manufacturing companies listed in Karachi Stock Exchange 100 Index and results
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revealed that the firm leverage play an important role in mitigation of the agency cost of free
cash flow by declining the free cash flow that is under the control of the manager.
K. Park and Jang (2013) jointly studied the inter-relationship among capital structure,
free cash flow, diversification and firm performance and concluded that the financial leverage is
an effective way to reduce free cash flow and improve firm performance.
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Parsian and Koloukhi (2014) investigated the factors affecting dividend payout ratio in
selected 102 companies, trading in Tehran Stock Exchange. They conclude with the negative and
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significant relationship between profitability and free cash flow while the financial leverage and
profitability has positive and significant relationship. Whereas; size of the firm, firm growth and
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systematic risk has no significant impact on current profitability ratio.
Brush, Bromiley, and Hendrickx (2000)tested the free cash flow hypothesis and found the
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negative relationship between free cash flow and firm performance.
Heydari et al. (2014)investigated the relationship between free cash flow and
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performance of the 63 companies listed in Tehran Stock Exchange for a period of seven years
data, ranging from 2006 to 2012. He measured performance of firms with four different variables
i.e. return on assets, return on equity, Tobin’s Q and stock return. He concludes with the
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significant negative relationship between free cash and performance and also found the positive
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relationship of profitability with the control variables i.e. size of firm and financial leverage.
Kadioglu et al. (2017) tested whether free cash flow affects the performance in context of
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free cash flow hypothesis of 370 listed firms in Borsa Istanbul for seven years data (2009 to
2015). In his study, he measured the performance through Tobin’s Q and found negative
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relationship between free cash flow and Tobin’s Q. Another study ofKadioglu and Yilmaz
(2017) test the validity of free cash flow hypothesis in Turkey. They concluded the negative
correlation exist among free cash flow, financial leverage and dividend payout and positive
correlation exist between size of firm and free cash flow.
Wen (2017) examined the conflict between free cash flow and profitability and role of
CEO ability in term of tenure to solve this conflict. He concludes that the firm’s with free cash
flow is worst performer than firms without free cash flow. He further concludes that the long
tenured CEO with high management skills, moderates the negative effects of free cash flow on
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firm performance and low tenured CEO and high CEO turnover, improves revenue growth with
declining performance.
Wu (2004) investigated the free cash flow hypothesis implications on company capital
structure policy of Japanese listed firms and concludes that the significance of relationship
between free cash flow and leverage is greater in low growth firm than high growth firm.
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Titman, Wei, and Xie (2004)examined relationship between capital investment and stock
returns and found that the firms with higher cash flows and lower financial leverage have
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negative abnormal relationship between capital investments and profitability.
Harford (1999) also supported the free cash flow hypothesis and found the cash rich firms
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are more interested in acquisition of other firms but afterwards their operational performance
would be decreased.
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Lang, Stulz, and Walkling (1991) tested free cash flow hypothesis, on a sample of
successful tender offers during a period from 1968 to 1986. Their results supported the said
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hypothesis, and suggested that the one percent increase in free cash flow of a bidder’s total
assets, causes one percent decrease in bidder’s ordinary share value.
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ATA ÜNAL and Aybars (2017) studied the relationship between free cash flow and over
investments, based on panel data of 154companies listed in Borsa-Istanbul for a period being
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2005-2015, and concluded that the firms which have excess free cash flow are over invested by
the managers and resulted into increased agency cost and reduced performance.
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iii) Studies Contrary to the Free Cash Flow Hypothesis:

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Kamran et al. (2017) studied the significance of free cash flow on the profitability of
firms listed in Karachi Stock Exchange (Now Pakistan Stock Exchange). For this purpose they
studied five years (2010-2014) financial data of 30 listed manufacturing companies. They used
return on capital employed, as a measure of profitability and computed free cash flow in terms of
Pakistani Rupees rather than as a ratio. They found the direct and positive relationship between
free cash flow and profitability
Ambreen and Aftab (2016) studied the impact of free cash flow, on profitability. They
studied five years data, for a time span 2010-2014, of 30 manufacturing companies listed in
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Karachi Stock Exchange. Similar to (Kamran et al., 2017) they take free cash flow in Pakistani
Rupees rather than as a ratio. Contrary to free cash flow hypothesis, they found the significant
positive relationship between free cash flow and profitability.
Wang (2010) conducted the threefold purposes study, and investigated the influence of
free cash flow on agency cost and how both affect the firm performance. He used total assets
turnover and operating expense ratio as a measure of agency cost. For this purpose he studied six
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years (2002-2007) data of 505 companies which were trading in Taiwan Stock Exchange. He
came with the results that the free cash flow causes to increase agency cost (as per agency
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theory) and it has positive relationship with performance (contrary to free cash flow hypothesis).
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Nobanee and Abraham (2017) studied the influence of equity concentration and free cash
flow on agency cost, and agency cost impact on performance of insurance companies listed in
Saudi Stock Exchange during the period of 2010 to 2013. They come up with the results contrary
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to agency theory and found that there is not any significant effect of equity concentration and
free cash flow on agency cost and agency cost have not any significant effect on performance of
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insurance companies of Kingdom of Saudi Arabia.
Mong’o (2010) studied the impact of cash flow on profitability of commercial banks
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trading in Kenya, during a period of 5 years (2005-2009) and found that the operating cash flow
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has negative impact on profit while cash flows from investing and financing activities have
positive impact on profitability of commercial banks.
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Habib (2011) examined the effect of growth opportunities and earning quality on the
market valuation of free cash flow and found the positive relationship between free cash flow
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and stock returns when earning are transitory.
Rezvani-Raz and Haghight (2005), studied the relationship between free cash flow and
debts and considered size of firm and investment opportunities as control variables and
concludes the positive relationship between free cash flow and debt of the companies which have
low investment opportunities.
Nakhaei and Jafari (2015) investigated the relationship between free cash flow and
capital structure and financial performance of firms listed in Tehran Stock Exchange for a period
from 2009 to 2013 and concluded that there is direct and significant relationship between free
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cash flow and financial performance and inverse and significant relationship between capital
structure and financial performance.
From the perusal of above literature review it is observed that the few studies have been
conducted to test the relationship between free cash flow and firm performance in Pakistan, most
of them produced the results contrary to the free cash flow hypothesis stated by the Jensen
(1986). However, most of the international studies produced the results according to the said
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hypothesis.
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2.2) RESEARCH HYPOTHESIS:
Based on the literature review on studies testing relationship between free cash flow and
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performance; following research hypothesis is developed:
Hypothesis: There is a significant relationship between free cash flow and

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performance in subsectors of textile industry of Pakistan.
2.3) THEORETICAL FRAMEWORK:

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Financial Firm
Leverage Growth
Free Cash Size of Firm
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Flow
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Performance
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In this study, the relationship between Free Cash Flow (an independent variable) and
Performance (dependent variable) in textile industry and subsectors of textile industry of
Pakistan is examined. Furthermore, to get the more significant result of this study, three control
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3) METHODOLOGY
variables i.e. Financial Leverage, Firm Growth and Size of Firm, have also been included in
analysis.
2.4) THEORETICAL MODEL:

Based on above theoretical framework theoretical model of this study are as under:
ROAit = α0 + β1FCFit + β2FLit + β3FSit + β4FGit+γ1D1,it+γ2D2,it+Єit
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Where:
ROA = Return on assets
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FCF = Free cash flow
FL = Financial Leverage
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FS = Firm Size
FG = Firm Growth
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D1 = 1, if company is belong to composite subsector
D1 = 0, otherwise (belong to any subsector other than composite)
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D2 = 1, if company is belong to spinning subsector
D2 = 0, otherwise (belong to any subsector other than spinning)
Є = Error term
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The model explains the relationship between free cash flow and performance in the
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textile industry of Pakistan while sub-sector effect is controlled by using two subsector dummies
i.e. composite sector and spinning sector are included and weaving sector is declared as base
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group and excluded from model to avoid multicolinearity (H. M. Park, 2011) to analyze this
relationship in subsectors (composite, spinning and weaving) of textile industry of Pakistan.
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3) METHODOLOGY
This chapter deals with the methodology of this study and discussed type of research,
research paradigm, nature of research, data collection sources, data collection tools, research
subject and participants and data processing, analysis techniques and interpretation.
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3) METHODOLOGY
3.1) TYPE OF RESEARCH:
The research which deals from numeric figures and numbers is a quantitative research
(Neuman, 2014). Since the objective of this study is to identify the impact of free cash flow on
performance of the textile industry of Pakistan and used numeric values data to fulfill this
objective. Hence, this study is quantitative in nature.
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3.2) RESEARCH PARADIGM:
Research paradigm refers to the belief system that set the path of things to be done during
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research (Saunders, Lewis, & Thornhill, 2009). Positivism relates working with observable
social reality (Saunders et al., 2009). In this study the relationship between free cash flow and
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performance in subsectors of textile industry of Pakistan in the light of free cash flow hypothesis
presented by Jensen (1986) is examined. Therefore, this study is positivistic deductive research
as this study test the already developed theory (i.e. free cash flow hypothesis) and designed the
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research strategy to test this hypothesis (Saunders et al., 2009).
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3.3) NATURE OF RESEARCH STUDY:
This study is descriptive and explanatory in nature because in this study the already
established free cash flow theory of Jensen (1986) is tested and also the design of this research
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i.e. data collection, measurement of variables, and statistical formula (multiple regression
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analysis) is structured (Saunders et al., 2009).
3.4) POPULATION AND SAMPLE FRAME:

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The complete set of objects from which sample is taken is called the population
(Saunders et al., 2009). During the period of this study, 149 textile companies were trading in
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PSX in subsectors of Textile Composite, Textile Spinning and Textile Weaving, so this was the
sampling frame of this study.
3.5) SAMPLE SIZE AND SAMPLING TECHNIQUE:

Neuman (2014) defines purposive sampling is a non probability sampling in which
researcher select sample on the basis of his judgment. This method was used to select sample of
this study on the basis of following criteria:
i. Companies must be in trade during the financial year 2012 to 2017.
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3) METHODOLOGY
ii. Financial information for calculation of variables, which have been used in this study,
must be available for the whole study period.
On the basis of above criteria 67 companies, comprising 21 composite, 40 spinning and 6
weaving companies, have been selected as a sample. Complete list of sample companies is
mentioned in Appendix - A.
3.6) DATA COLLECTION SOURCES:
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Six Years secondary data for the period being 2012 to 2017 of Textile Companies listed
in PSX, has been collected. Data collection sources were Annual Reports and Financial
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Statements, Economic Survey of Pakistan, and Analysis of Financial Statements of Companies
(Non-financial) Listed at Karachi Stock Exchange, published by State Bank of Pakistan.
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Financial Statements include Balance Sheet, Profit and Loss Account, Statement of
Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity and Notes to
the Accounts. IV
3.7) DATA COLLECTION TOOLS:
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Statistical Quality Standards (2010) defines data collection tools are the instruments used
in a study to collect data or information, e.g. questionnaire, interviews, observations etc. In this
study, 402 observations were computed from annual reports and financial statements and used as
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data collection tool.

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3.8) DEFINITION & MEASUREMENT OF VARIABLES:

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3.8.1) Dependent Variable:

Performance:
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Return on assets (ROA) has been used as a proxy of performance. It measures how much
company’s resources are earning and provide rate of return to all capital providers (White,
Sondhi, & Fried, 2002). Similarly (Arshad & Gondal, 2013; Parveen, Khattak, Qayyum, &
Afzal, 2014), ROA is calculated by following formula:
ROA = Earnings before interest and taxes / Total assets
3.8.2) Independent Variable:-

Free Cash Flow (FCF):
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3) METHODOLOGY
Free cash flow is a balance cash available to the fund providers of the company after
payment of all operating expenses, working capital payments and capital expenditures (Brealey,
Myers, & Marcus, 2012). Following measures were used in previous studies:
i) Net profit minus changes in working capital minus changes in fixed assets divided by
total assets (Utami & Inanga, 2011).
ii) Operating profit before depreciation minus interest expenses minus taxes minus
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preferred dividends divided by book value of assets(Wu, 2004).
iii) Subtracting total tax on profit, gross interest expenses and expenses on investment
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activity from operating profit before depreciation (Chu, 2010).
iv) Operating income before depreciation divided by total assets (Khan et al., 2012).
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v) Earnings before interest and taxes plus depreciation minus taxes minus changes in
working capital minus capital expenditures (Ambreen & Aftab, 2016).
vi) IV
Operating cash flow minus taxes minus interest expenses minus dividend divided by
sales (Lehn & Poulsen, 1989).
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Similarly, (Ambreen & Aftab, 2016; Brealey et al., 2012; White et al., 2002), this study
used the following equation for calculation of free cash flow as a ratio (as used in international
studies), stead in Rupees, for the purpose of matching observations with dependent variable.
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FCF = [EBIT (1-tax) + depreciation + amortization – change in working capital

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– capital expenditures] / Total assets

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3.8.3) Control Variables:-

i) Financial Leverage (FL):
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Financial leverage represents capital structure of firm that also affects the performance.
Capital structure decisions are of critical importance for the life and profitability of the firms and
managers should have great focus on them. Like (Heydari et al., 2014; Kadioglu et al., 2017;
Wang, 2010), financial leverage is computed as:
FL = Total debt / Total assets
ii) Firm Size (FS):
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3) METHODOLOGY
Different researchers used different proxies for measuring firm size. Wang (2010) used
natural log of sales, Parsian and Koloukhi (2014) used natural log of market value of
shareholders equity to calculate firm size. Researchers have empirically proved the relationship
between firm size and performance. Considering the importance of this variable for the
performance of the firms this study is also used firm size as control variable. Similar to
(Kadioglu et al., 2017; Khan et al., 2012), firm size is measured as:
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FS = Natural log of total assets
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Similar to (Hussain, 2014); relative size of firm (RSF) (Total assets of firm / Total assets
of industry) is also tested, but due to insignificant results, this variable has been dropped from
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this study (for results see Appendix - B).
iii) Firm Growth (FG):

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Firm growth measures the expansion of business and also has an impact on performance
of the firms (Wen, 2017). Similar to studies (Ahmad, Ishtiaq, Hamid, Khurram, & Nawaz, 2017;
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Nobanee & Ellili, 2015; Wen, 2017) firm growth is measured as:
FG = (Current year sales – Previous year sales) / previous year sales

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The following table 3.8.1 summarizes the list of variables, their nature, symbol, definition
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and measurement, used in this study:-
Table 3.8.1: Variables and Measures:

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Variables Nature Symbol Definition Measure

Return on assets Dependent ROA Rate of return to all Earnings before
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capital providers. interest and taxes /

Total assets
Free cash flow Independent FCF Earnings before interest [EBIT (1-tax) +
and taxes plus depreciation +
depreciation minus taxes amortization – change
minus changes in working in working capital –
capital minus capital capital expenditures] /
expenditures. Total assets
Financial leverage Control FL Financial leverage FL = Total debt / Total
represents capital structure assets
of firm
Firm size Control FS Fixed assets employed in FS = Natural log of
a business total assets
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3) METHODOLOGY
Firm growth Control FG Expansion of business FG = (Current year

sales – Previous year
sales) / previous year
sales
3.9) DATA PROCESSING, ANALYSIS TECHNIQUES AND INTERPRETATION:

First of all, relevant financial information extracted from annual reports of sixty seven
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sample companies, for calculation of variables in Micro Soft Excel. These variables were
arranged and coded into Panel data form. STATA software was used for testing the relationship
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between free cash flow and performance in each subsector of textile industry of Pakistan by
using multiple regressions.
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The hypothesis of this study is that there is a significant relationship between free cash
flow and performance in subsector of textile industry of Pakistan. To test the said hypothesis two
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regression models were run; first, for the analysis of entire textile industry and second for the
sub-sector analysis, the later model includes two sub-sector dummies i.e. composite and
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spinning, weaving sector is declared as a base group.
Panel Data:
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In a panel data (also known as longitudinal data or cross sectional time series data),
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repeated observations of different individuals at different time period are presented. Panel data
examines individual effects in fixed effect model and / or random effect model (H. M. Park,
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2011).
Fixed vs Random Effect Model:

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In a fixed effect model individual effects are correlated with independent variables. On
the other hand, in random effect model individual effects are not correlated with independent
variables (H. M. Park, 2011). In this study fixed effect model was used to analyze the impact of
free cash flow on performance of the textile industry of Pakistan.
The following table 3.9.1 explains the distinction between fixed effect and random effect
models.
Table 3.9.1: Fixed Effect and Random Effect Models
Fixed Effect Model Random Effect Model
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4) RESULTS:
Functional form Yit = (α +µi ) + X’it β + vit Yit = α + X’it β + (µi + vit )
Assumption - Individual effects are not
correlated with regressors
Intercepts Varying across group and/or time Constant
Error variances Constant Randomly distributed across
group and/or time
Slopes Constant Constant
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Estimation Least Square Dummy Variables, Generalized Least Square,
within effect estimation Feasible Generalized Least
Square (Estimated Generalized
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Least Square)
Hypothesis Test F Test Breusch-Pagan LM test
Source: Park, H. M. (2011). "Practical guides to panel data modeling: A step by step analysis using Stata." Public Management
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and Policy Analysis Program, Graduate School of International Relations, International University of Japan.
Least Square Dummy Variables (LSDV) Model:

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The individual effect overtime in each individual is assumed to be fixed in LSDV model,
it is implemented by the inclusion of dummy variable in a model (Okeke & Okeke, 2016). LSDV
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model was used to analyze the impact of free cash flow on performance in sub-sectors of textile
industry of Pakistan as two sub-sectors dummies (i.e. composite and spinning) were inserted in
theoretical model and weaving sector declared as base group and not included in theoretical
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model. This model was used to cope with the problem of multicollinearity which might be
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occurred in case of using fixed effects panel data set with dummy variables.
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VI
4) RESULTS:
This chapter includes results of the study i.e. descriptive statistics, correlation analysis;
diagnostic tests performed during analysis of panel data and finally regression results have also
been explained in this chapter.
4.1) DESCRIPTIVE STATISTICS:
Descriptive statistics is the field of quantitatively describing the main features of the data
(AKUMU). Descriptive statistics are different from inferential statistics, in that descriptive
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4) RESULTS:
statistics summarize a sample, rather than use the data to learn about the population that the
sample of data is thought to represent (AKUMU).
In this subsection first descriptive statistics of entire textile industry has been discussed,
secondly subsector wise descriptive statistics is explained and then comparative graphical
analysis has been presented.
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4.1.1) INDUSTRY:
The following table 4.1.1 mentioned descriptive statistics of textile industry of Pakistan:-
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Table 4.1.1: Descriptive Statistics of Textile Industry of Pakistan
Variable Mean Standard Minimum Maximum Numbers
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Deviation
ROA 0.0532621 0.0959456 (0.6002218 ) 0.478543 67
FCF 0.0282322 0.1101344 (0.6017607) 0.5134122 67
FL
FS
0.5882911
6.501607
0.2342713
0.7204767
IV 0.0229589
3.079181
1.953594
7.735951
67
67
FG 0.0338617 0.6314757 (0.9810014) 9.95664 67
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Note: ROA= Return on Assets; FCF= Free cash flow; FL = Financial leverage; FS= Firm size; FG= Firm growth
Above table shows that the Return on assets (ROA) (proxy for performance) of entire
textile industry of Pakistan has a mean 0.0532621, with standard deviation of 0.0959456, it
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shows that the average value of return on assets is 5.3%; standard deviation of 0.095% indicates
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no significant variation in ROA of listed textile firms. The minimum value of ROA is -
0.6002218 while maximum value is 0.478543. It means that during the study period, the textile
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industry of Pakistan generated maximum 47.85% return on assets and minimum 60% loss on
assets.
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The free cash flow (FCF) has a mean 0.0282322 and standard deviation 0.1101344, it
shows that the average generation rate of FCF per asset is 2.82%; standard deviation of 0.11%
indicates very little significant variation in FCF per asset of listed textile firms. The minimum
value of FCF is -0.6017607 while it has maximum value of 0.5134122. It means that during the
study period the maximum FCF per asset generated is 51.34% and minimum is -60.17% and
FCF of textile sector lies in range -0.602-0.513.
The financial leverage (FL) has a mean of 0.5882911 with standard deviation 0.2342713,
it shows that average value of debt is 58.82% in total assets; standard deviation 0.23% indicates
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4) RESULTS:
little significant variation in financial leverage of listed textile firms. The minimum score of FL
is 0.0229589 and maximum score is 1.953594. It shows that maximum amount of debt in total
asset is 195%, it means that assets are not sufficient to cover debts, the minimum debt value is
2.29%.
The firm size (FS) has a mean 6.501607 with standard deviation 0.7204767. The
minimum value of FS is 3.079181 while maximum value is 7.735951. The firm growth (FG) has
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a mean 0.0338617 with standard deviation 0.6314757. The minimum value of FG is -0.9810014
while maximum value is 9.95664.
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4.1.2) SUBSECTORS:
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Pakistani textile sector may divide into three subsectors i.e. composite, spinning and
weaving. In PSX 53 composite, 82 spinning and 14 weaving companies are trading. In this
section descriptive statistics of subsector of textile industry is presented and discussed.
Composite:
IV
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The following table 4.1.2 shows descriptive statistics related to subsector composite:-
Table 4.1.2 Descriptive Statistics of Composite Sector

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Deviation
Return on assets 0.0745737 0.0654262 (0.1465327) 0.2717777 21
Free cash flow 0.0362671 0.1011114 (0.1837486) 0.3470401 21
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Financial 0.5412356 0.1865975 0.2125157 0.9878221 21

leverage
Firm size 6.872278 0.6512345 4.172515 7.735951 21
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Firm growth 0.0794294 0.9105679 (0.9553165) 9.95664 21

Above table shows that the ROA of composite sector has a mean 0.0745737, with
standard deviation of 0.0654262, it means that average value of return on assets is 7.46%;
standard deviation of 0.065% indicates a no significant variation in ROA. The minimum value of
ROA is -0.1465327 while maximum value is 0.271777. It means that during the study period, the
subsector composite generated maximum 27.18% return on assets and minimum 14.65% loss on
assets.
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4) RESULTS:
The FCF has a mean 0.0362671 and standard deviation 0.1011114, it shows that average
generation rate of FCF per asset is 3.63%; standard deviation of 0.10% indicates very little
significant variation in FCF per asset. The minimum value of FCF is -0.1837486 while it has
maximum value of 0.3470401. It means that during the study period the maximum FCF per asset
generated is 34.70% and minimum is -18.37%, and FCF of subsector composite lies in range -
0.183-0.347.
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The FL has a mean of 0.5412356 with standard deviation 0.1865975, it shows that
average value of debt is 54.12% in total assets; standard deviation 0.19% indicates little
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significant variation in financial leverage. The minimum score of FL is 0.2125157 and maximum
score is 0.9878221. It shows that maximum amount of debt in total asset is 98.78%; it means that
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98% of total assets are owned by the creditors, the minimum debt value is 21.25%.
The FS of composite sector has a mean 6.872278 with standard deviation 0.6512345. The
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minimum score of FS in composite sector is 4.172515 while maximum value is 7.735951. The
FG in composite sector has a mean 0.0794294 with standard deviation 0.9105679. The minimum
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value of FG in this subsector is -0.9553165 while maximum value is 9.95664.
Spinning Sector:
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The following table 4.1.3 mentioned descriptive statistics related to subsector spinning:-
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Table 4.1.3 Descriptive Statistics of Spinning Sector

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Deviation
Return on assets 0.0412819 0.1031947 (0.6002218) 0.4785431 40
Free cash flow 0.0210998 0.1129522 (0.6017607) 0.5134122 40
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Financial 0.6002248 0.2424567 0.0229589 1.953594 40

leverage
Firm size 6.302962 0.7048222 3.079181 7.440487 40
Firm growth 0.0103383 0.4150567 (0.9810014) 3.675325 40
Above table shows that the ROA of spinning sector has a mean 0.0412819, with standard
deviation of 0.1031947, it shows that the average value of return on assets is 4.13%; standard
deviation of 0.103% indicates a very little significant variation in ROA in listed spinning textile
firms. The minimum value of ROA is -0.6002218 while maximum value is 0.4785431. It means
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4) RESULTS:
that during the study period, the subsector spinning generated maximum 47.85% return on assets
and minimum 60.02% loss on assets.
The FCF has a mean 0.0210998 and standard deviation 0.1129522, it shows that average
significant variation in FCF per asset of listed spinning textile firms. The minimum value of FCF
is -0.6017607 while it has maximum value of 0.5134122. It means that during the study period
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the maximum FCF per asset generated is 51.34% and minimum is -60.18% %, and FCF of
subsector spinning lies in range -0.602-0.513.
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The FL has a mean of 0.6002248 with standard deviation 0.2424567, it means that
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average value of debt is 60.02% in total assets; standard deviation 0.242% indicates little
significant variation in financial leverage of listed spinning textile firms.. The minimum score of
FL 0.0229589 and maximum score is 1.953594. It shows that, in spinning sector, maximum
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amount of debt in total asset is 195.36%, it means that assets are not sufficient to cover debts, the
minimum debt value is 2.30%.
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The FS of spinning sector has a mean 6.302962 with standard deviation 0.7048222. The
minimum score of FS in spinning sector is 3.079181 while maximum value is 7.440487. The FG
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in spinning sector has a mean 0.0103383 with standard deviation 0.4150567. The minimum
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value of FG in this subsector is -0.9810014 while maximum value is 3.675325.
Weaving Sector:
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The following table 4.1.4 mentioned descriptive statistics related to subsector weaving:-
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Table 4.1.4 Descriptive Statistics of Weaving Sector

Deviation
Return on assets 0.0585398 0.1217176 (0.3697869) 0.269748 6
Free cash flow 0.0476592 0.1198668 (0.2552289) 0.2677301 6
Financial 0.6734271 0.2943273 0.1767417 1.647061 6
leverage
Firm size 6.528555 0.5238005 4.503559 7.301534 6
Firm growth 0.0311971 0.6479406 (0.9281273) 3.556307 6
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4) RESULTS:
Above table shows that the ROA of weaving sector has a mean 0.0585398, with standard
deviation of 0.1217176, it means that average value of return on assets is 5.85%, and standard
deviation of 0.122% indicates a very little significant variation in ROA in listed weaving textile
firms. The minimum value of ROA is -0.3697869 while maximum value 0.269748. It means that
during the study period, the subsector weaving generated maximum 26.97% return on assets and
minimum 36.98% loss on assets.
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The FCF has a mean 0.0476592 and standard deviation 0.1198668, it means that average
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significant variation in FCF per asset of listed weaving textile firms. The minimum value of FCF
is -0.3697869 while it has maximum value of 0.2677301. It means that during the study period
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the maximum FCF per asset generated is 26.77% and minimum is -36.98% %, and FCF of
subsector weaving lies in range -0.369-0.267.
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The FL has a mean of 0.6734271 with standard deviation 0.2943273, average value of
debt is 67.34% in total assets; standard deviation 0.94% indicates little significant variation in
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financial leverage of listed weaving textile firms. The minimum score of FL 0.1767417 and
maximum score is 1.647061. It shows that maximum amount of debt in total asset is 164.71%, it
means that assets are not sufficient to cover debts, the minimum debt value is 17.67%.
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The FS of weaving sector has a mean 6.528555 with standard deviation 0.5238005. The
minimum score of FS in weaving sector is 4.503559 while maximum value is 7.301534. The FG
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in weaving sector has a mean 0.0311971 with standard deviation 0.6479406. The minimum value
of FG in this subsector is -0.9281273 while maximum value is 3.556307.
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. The following figure 4.1 showing separate results of each variable for entire industry and
its sub-sectors, during study period i.e. 2012-2017.
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4) RESULTS:
Figure 4.1: Variable Trends In Textile Industry of Pakistan from 2012 to 2017.
Figure 4.1 (a): Return on Assets (ROA)
RETURN ON ASSETS (ROA)

15.00%
10.00%
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INDUSTRY
5.00% COMPOSITE
SPINNING
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0.00%
2012 2013 2014 2015 2016 2017 WEAVING
-5.00%
ER
-10.00%
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The above figure 4.4 (a) shows that the Return on assets (ROA) has highest value in the
year 2013 for entire textile industry and its sub-sectors. From 2014, ROA of entire industry and
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its subsectors started to decline, in year 2016 it became negative for entire industry and also for
spinning and weaving sectors; only composite sector has positive value of ROA in that year. In
2017, it again became positive for entire industry and its subsectors. It is further noticed that
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composite sector produced highest ROA during the study period.

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Figure 4.1 (b): Free Cash Flow (FCF).
FREE CASH FLOW (FCF)

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20.00%
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15.00%
10.00% INDUSTRY
5.00% COMPOSITE
0.00% SPINNING
2012 2013 2014 2015 2016 2017
-5.00% WEAVING
-10.00%
-15.00%
The above figure 4.1 (b), shows that the free cash flow (FCF) has highest value in the
year 2012 in entire textile industry and its subsectors, from the year 2013 it started to decline in
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4) RESULTS:
each year, but in 2015 it again increased in entire industry and its subsectors. From 2016, it
became negative in entire industry and its subsectors. Year 2017 produced lowest level of free
cash flow during the study period. Weaving sectors produced highest level of FCF from 2012 to
2016, but in 2017 it produced lowest FCF.
Figure 4.1 (c): Financial Leverage (FL)
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FINANCIAL LEVERAGE (FL)
80.00%
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70.00%
60.00%
50.00% INDUSTRY
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40.00% COMPOSITE
30.00% SPINNING
20.00%
10.00%
0.00%
IV WEAVING
2012 2013 2014 2015 2016 2017

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Financial leverage (FL) of entire industry and subsectors has highest value in the year
2016 and lowest value in 2012 as depicts in above figure 4.1 (c). Weaving sector has highest
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amount of FL while the composite sector has lowest in the entire industry.
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Figure 4.1 (d): Firm Size (FS).

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FIRM SIZE (FS)

700.00%
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680.00%
660.00%
INDUSTRY
640.00%
COMPOSITE
620.00%
SPINNING
600.00%
WEAVING
580.00%
560.00%
2012 2013 2014 2015 2016 2017
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4) RESULTS:
In the above figure 4.1 (d), firm size (FS) has highest value in the year 2013 and lowest
value in 2016. Composite sector has the highest firm size while the spinning sector has lowest,
during the study period 2012 to 2017.
Figure 4.1 (e): Firm Growth (FG).
FIRM GROWTH (FG)
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50.00%
40.00%
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30.00%
INDUSTRY
20.00%
COMPOSITE
ER
10.00%
SPINNING
0.00%
WEAVING
2012 2013 2014 2015 2016 2017
-10.00%
-20.00%
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-30.00%
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Figure of firm growth depicts mix results. Composite sector has highest growth value in
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the year 2015, spinning sector in 2014 while the weaving sector has highest value in the year
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2012. In 2013, entire industry and its subsectors have positive growth value while in the year
2016 they have negative growth value.
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Hence it is concluded that the weaving sector contributed highest amount of return in
entire industry, it also generates highest FCF and availing highest debt in the entire textile
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industry of Pakistan. Spinning sector produced lowest return and generates lowest FCF.
4.2) INDUSTRY RESULTS:

4.2.1) Correlation Analysis:
Pearson correlation coefficient tells the strength of relationship between two variables.
The value of coefficient of correlation is always between -1 to +1, ±1 shows perfect positive /
negative relationship, ±0.7 shows strong positive / negative relationship, ±0.5 shows moderate
positive / negative relationship, ±0.3 shows weak positive / negative relationship and 0 depicts
no relationship between two variables (Rumsey).
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4) RESULTS:
The following table 4.2.1 shows the Pearson’s correlation analysis of textile industry of
Pakistan
Table 4.2.1: Correlation Matrix of Textile Industry

ROA FCF FL FS FG
Textile Industry (N=67)
ROA 1.0000
FCF 0.3955 1.0000
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FL -0.4302 -0.2102 1.0000
FS 0.4241 0.0799 -0.1566 1.0000
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FG 0.1769 0.0673 0.0909 0.0993 1.0000
The above table 4.2.1 shows that in the textile industry of Pakistan, performance is
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positively correlated with FCF, FS and FG and negatively correlated with FL. It means that when
the amount of FCF, FS and FG increases the performance (ROA) of textile industry of Pakistan
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also increases and vice versa, and when the amount of FL increases the performance (ROA) will
be decreased.
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4.2.2) Regression Analysis:
A multiple regression was run to establish the relationship between independent and
dependent variables. The following table 4.3.1 shows the multiple regression results of textile
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industry of Pakistan:
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Table 4.2.2: Regression Results of Textile Industry of Pakistan

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Entire Industry (N=67)

{R = 0.4093; Chi-Square=221.45; P>Chi2=0.0000
2
ROA=-0.153 + 0.250FCF - 0.140FL + 0.043FS + 0.011FG

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ROA Coefficients Standard Error Z-Statistics Significance

Level (5%)
Constant -0.152823 0.047317 -3.23 0.001
FCF 0.2498246 0.0323548 7.72 0.000
FL -0.1401486 0.0194398 -7.21 0.000
FS 0.043239 0.0067879 6.37 0.000
FG 0.0105469 0.0056201 1.88 0.061
In the above table 4.2.2, the regression results of 67 sample textile companies for the
period being 2012 to 2017 have been presented. The value of R 2 is 0.4093; it means that one
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4) RESULTS:
independent variable FCF and three control variables FL, FS and FG explain 40.93% variability
in the dependent variable ROA.
From the above table 4.2.2 it is observed that there is positive relationship between FCF
and ROA significant at a level of 5%, and showing that for every one unit increase in FCF, the
ROA is increased by 24.98%. It is also observed from the above table 4.2.2, the control variable
FL is significantly negative related with performance in entire textile industry of Pakistan and
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increase in one unit in FL the ROA of the industry is decreased by 14.01%. The FS is
significantly positive related with performance in textile industry of Pakistan and showing that
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one unit increase in FS the ROA is increased by 4.3%. FG is insignificantly positive related with
performance in textile industry of Pakistan and showing that one unit increase in FG the ROA is
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increased by 1.05%.
Table 4.2.2; shows regression results without performing any diagnostic tests in panel
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data. Issues of Multicollinerity, heteroskedasticity and auto / serial correlation are common in
panel data and also it is very necessary to determine whether the fixed effect or random effect
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model is appropriate for the study. Therefore; Variance Inflation Factor (VIF) test, Breusch–
Pagan test of heteroskedasticity and Wooldridge test for auto correlation were performed to
identify the above problems and Hausman test was also performed to determine the appropriate
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model (i.e. fixed effect or random effect) for entire textile industry.
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4.2.3) Diagnostic Tests:

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MulticollinearityTest:
The problem of multicollinearity is occurred when an independent variable is highly
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related with other independent variable(s) (Ali, Ullah, & Ullah, 2016). This is common problem
in panel data set. Variance Inflation Factor (VIF) test is performed to determine
multicollinearity. The VIF value more than 10, showing the problem of multicollinearity
amongst the independent variables, and those variable(s) must be removed from study as a
remedy of multicollinearity (Ali et al., 2016).
The below table 4.2.3 showing the results of Variance Inflation Factor (VIF) test
performed, during panel data analysis.
27
4) RESULTS:
Table 4.2.3.1:Variance Inflation Factor (VIF) Test (Industry):
Variables VIF Value

FCF 1.06
FL 1.10
FS 1.17
FG 1.02
Note: FCF= Free cash flow; FL = Financial leverage; FS= Firm size; FG= Firm growth
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In the above table 4.2.3.1 showing VIF value of all explanatory variables is less than 10,
which showing that there is no problem of multicollinearity.
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Hausman Test:
Hausman test is performed to determine whether the fixed effect model or random effect
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model is appropriate(Heydari et al., 2014). The hypotheses for Hausman test are as under:
H0: Random effect model is appropriate.
H1: Fixed effect model is appropriate. IV
In case of p- value less than 0.05 fixed effect model is appropriate and if p-value greater
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than 0.05 random effect models is appropriate (Ali et al., 2016). The p-value of Hausman Test
for this study is 0.0078, which is less than 0.05 significant level, hence the null hypothesis is
rejected and decided that fixed effect model is appropriate for this study.
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Heteroskedasticity Test:
The term heteroskedasticiy refer to the circumstances in which variability of variable
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remains unequal across the range of values of an explanatory variable (Taylor). It is occurred in
the absence of Homoskedasticity. Heteroskedasticity is a common problem in panel data and
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Breusch–Pagan test is performed to determine group-wise heteroskedasticity. The hypotheses of

the test are as under:
H0: There is homoskedasticity and no heteroskedasticity exist.

H1: There is no homoskedasticity and heteroskedasticity exist.
In case of p- value less than 0.05 there is heteroskedasticity exist and if p-value greater
than 0.05 there is homoskedasticity exist. The p-value of this test for this study is 0.0000, which
28
4) RESULTS:
is less than 0.05 significant level, it means that there is no homoskedasticity and
heteroskedasticity exist in the data. Hence, regression results in robust system estimation are
presented, as a remedy of heteroskedasticity.
Auto / Serial Correlation:

The auto / serial correlation is occurred where error term in data is transferred from one
time period to another time period (Williams, 2015). This problem is determined through
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Wooldridge test for auto correlation. The hypotheses of the test are as under:-
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H0: There is no auto correlation.
H1: There is auto correlation.
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In case of p- value less than 0.05 there is auto correlation exist and if p-value greater than
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0.05 there is no auto correlation exist. The p-value of this test for this study is 0.0096, which is
less than 0.05 significant level; it means that there is auto correlation in the data. Hence, standard
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error of regression results has been adjusted in clusters, as a remedy of auto correlation.
The following table 4.2.3.2 summarizes the results of above mentioned diagnostic tests:-
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Table 4.2.3.2: Results of Diagnostic Tests

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Tests Purpose Results P-Value Decision

Hausman Test Fixed effect Chi-square = 0.0078 Fixed effect
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model or random 13.85 model is

effect model appropriate.
Breusch–Pagan To check the Chi-square = 0.0000 Heteroskedasticity
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test for heteroskedasticity 15387.15 exist

Heteroskedasticity
Wooldridge test To check the F (1,66) = 7.113 0.0096 Auto-correlation
for Auto auto-correlation exist.
Correlation
4.2.4) Fixed Effect Regression Results:

The following table 4.2.4shows the fixed effect regression results of textile industry of
Pakistan, after performing diagnostic test as stated in chapter 4.2.3:
29
4) RESULTS:
Table 4.2.4: Fixed Effect Panel Regression Results of Textile Industry of Pakistan

2
{R = 0.3777; F=21.79; P>F=0.0000
ROA=-0.021+0.237FCF-0.182FL+0.027FS+0.008FG
ROA Coefficients Robust T-Statistics Significance
Standard Error Level (5%)
Constant -0.0212812 0.1089308 -0.20 0.846
FCF 0.2375412 0.0627771 3.78 0.000
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FL -0.1820652 0.0714432 -2.55 0.013
FS 0.0268615 0.0141014 1.90 0.061
FG 0.0089049 0.0096152 0.93 0.358
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In the above table 4.2.4, the fixed effect panel regression results of 67 sample textile
companies for the period being 2012 to 2017 have been presented. The value of R2 is 0.3777; it
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means that one independent variable FCF and three control variables FL, FS and FG explain
37.77% variability in the dependent variable ROA.
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From the table 4.2.4 it is observed that there is positive relationship between FCF and
ROA significant at a level of 5%, and showing that for every one unit increase in FCF, the ROA
is increased by 23.75%. It is also observed from the above table 4.2.4, the control variable FL is
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significantly negative related with performance in entire textile industry of Pakistan and increase
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in one unit in FL the ROA of the industry is decreased by 18.21%. The FS is insignificantly
positive related with performance in textile industry of Pakistan and showing that one unit
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increase in FS the ROA is increased by 2.7%. FG is insignificantly positive related with

performance in textile industry of Pakistan and showing that one unit increase in FG the ROA is
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increased by 0.08%.
The overall results of table 4.2.4, concludes that there is significant positive relationship
between free cash flow and performance, and FS and FG are also have positive relationship with
performance, but this relationship is insignificant. Financial leverage significantly negative
related with performance in textile industry of Pakistan. Following regression equation is
obtained from the results of entire textile industry:-
ROA=-0.021 + 0.237FCF - 0.182FL + 0.027FS + 0.008FG
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4) RESULTS:
4.3) SUBSECTORS RESULTS:

In PSX, textile industry is divided into three subsectors i.e. composite, spinning and
weaving. During the study period, 53 composite, 82 spinning and 14 weaving companies are
trading in PSX. For this study purposive 21 composite, 40 spinning and 6 weaving companies
are selected as a sample and its analysis and results are mentioned in this sub-section.
4.3.1) Correlation Analysis:
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The following table 4.3.1 shows the Pearson’s correlation analysis of sub sectors
of textile industry in Pakistan.
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Table 4.3.1: Correlation Matrix of Subsectors
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Composite Sector (N=21)
ROA FCF FL FS FG
ROA 1.0000
FCF
FL
FS
0.3281
-0.2609
0.3326
1.0000
-0.0873
0.0134
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1.0000
0.0772 1.0000
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FG 0.0965 0.0313 0.0707 0.1194 1.0000
Spinning Sector (N=40)
ROA FCF FL FS FG
ROA 1.0000
FCF 0.3868 1.0000
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FL -0.3723 -0.2034 1.0000

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FS 0.4017 0.0568 -0.1391 1.0000

FG 0.2646 0.0426 -0.1946 0.0091 1.0000
Weaving Sector (N=6)
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ROA FCF FL FS FG
ROA 1.0000
FCF 0.5511 1.0000
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FL -0.8846 -0.5093 1.0000

FS 0.6411 0.2813 0.6319 1.0000
FG 0.2467 0.3517 -0.2796 0.4532 1.0000
The above table 4.3.1 shows that in the sub sectors of textile industry of Pakistan,
performance is positively correlated with FCF, FS and FG and negatively correlated with FL. It
means that when the amount of FCF, FS and FG increases, the performance (ROA) of all
subsectors of textile industry of Pakistan is also increased and vice versa, and when the amount
of FL increases the performance (ROA) is decreased.
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4) RESULTS:
4.3.2) Regression Analysis:

The least square dummy variables (LSDV) model is used to analyze the impact of free
cash flow on performance in sub-sectors of textile industry of Pakistan. This model was used to
cope with the problem of multicollinearity which might be occurred in case of using fixed effects
panel data set with dummy variables.
The following table 4.3.2 shows the multiple regression results of subsectors of textile
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Table 4.3.2: Regression Results of Sub-sector of Textile Industry in Pakistan
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Sub-sector (Composite =21; Spinning = 40; Weaving = 6 )
{R2 = 0.4041; F=46.33; P>F=0.0000
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ROA Coefficients Standard Error T-Statistics Significance
Level (5%)
FCF 0.2574597 0.0345464 7.45 0.000
FL
FS
FG
-0.1274555
0.0468447
0.0144581
0.0165208
0.0055641
.0059098
IV -7.71
8.42
2.45
0.000
0.000
0.015
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Composite -0.0146806 0.0142786 -1.03 0.305
Sector Dummy
Spinning Sector -0.0088806 0.0134098 -0.66 0.508
Dummy
Constant -0.1741776 0.0411261 -4.24 0.000
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In the above table 4.3.2; the model has value of R2 0.4041, it means that one independent
variable FCF, three control variables FL, FS and FG and two subsector dummy variables i.e.
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composite and spinning defined 40.41% variability in the dependent variable ROA. The above
model shows different intercepts for each sub-sector but the same slopes of regressors i.e. FCF,
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FL, FS and FG. In the above table 4.3.2 constant represents the base group intercept i.e. weaving
sector and the intercept of composite sector and spinning sector are 0.0147 and 0.0088
respectively, less than the base group weaving sector, but both deviation is not statistically
significant (H. M. Park, 2011).
of each sub-sector is increased by 25.75%. The FL is significantly negative related with
performance in each subsectors of textile industry, for one unit increase in FL the ROA is
32
4) RESULTS:
dropped by 12.75% in each sub-sector. The FS has positive relationship with performance at
significance level 5% and showing that for every one unit increase in FS, the ROA is increased
by 4.68%, and one unit increase in FG the ROA is increased by 1.45% significant at a level of
5%.
Following tests also performed during subsector analysis.
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4.3.3) Diagnostic Tests:
Multicollinearity Test:
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The following table 4.3.3 showing the results of Variance Inflation Factor (VIF) test
performed, during LSDV analysis.
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Table 4.3.3: Variance Inflation Factor (VIF) Test (Subsectors):
Variables VIF Value

FCF
FL
1.06
1.10
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FS 1.17
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FG 1.02
Composite Sector Dummy 3.22
Spinning Sector Dummy 3.17
Note: FCF= Free cash flow; FL = Financial leverage; FS= Firm size; FG= Firm growth
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In the above table 4.3.3 showing VIF value of all explanatory variables is less than 10,
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which showing that there is no problem of multicollinerity. Hence, independent variable FCF,
control variables FL, FS, FG and two dummies of composite sector, and spinning sector have
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been added in the analysis, furthermore weaving sector result are not shown in above table as it
is declared as base group.
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Heteroskedasticity Test:
In case of p- value less than 0.05 there is heteroskedasticity exist and if p-value greater
than 0.05 there is homoskedasticity exist. The p-value of this test for this study is 0.0000, which
is less than 0.05 significant level, it means that there is no homoskedasticity and
heteroskedasticity exist in data. Hence, following LSDV regression results of Sub sector of
Textile Industry of Pakistan is presented in robust system estimation, as a remedy of
heteroskedasticity.
33
4) RESULTS:
4.3.4) LSDV Regression Results of Sub-sectors:

The following table 4.3.4 shows the LSDV regression results of sub-sectors of textile
Table 4.3.4: LSDV Regression Results of Sub-sector of Textile Industry of Pakistan

Sub-sector (Composite =21; Spinning = 40; Weaving = 6 )
{R2 = 0.4131; F=26.32; P>F=0.0000
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FCF 0.2574597 0.0657983 3.91 0.000
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FL -0.1274555 0.032096 -3.97 0.000
FS 0.0468447 0.0042489 11.03 0.000
FG 0.0144581 0.0104481 1.38 0.171
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Composite -0.0146806 0.0158561 -0.93 0.358
Sector Dummy
Spinning Sector -0.0088806 0.0162228 -0.55 0.586
Dummy
Constant -0.1741776 0.0302214
IV -5.76 0.000
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In the above table 4.3.4 the LSDV model has value of R2 0.4131, it means that one
independent variable FCF, three control variables FL, FS and FG and two subsector dummies i.e.
composite and spinning defined 41.31% variability in the dependent variable ROA. In the above
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table 4.3.4 constant represents the base group intercept i.e. weaving sector and the intercept of
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composite sector and spinning sector are 0.0147 and 0.0088 respectively, less than the base
group weaving sector, but both deviation is not statistically significant (H. M. Park, 2011).
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of each sub-sector is increased by 25.75%. FL is significantly negative related with performance

in each subsectors of textile industry, for one unit increase in FL the ROA is dropped by 12.75%
in each sub-sector. The FS has positive relationship with performance at significance level 5%
and showing that for every one unit increase in FS, the ROA is increased by 4.68%, and one unit
increase in FG the ROA is increased by 1.45% but this relationship is insignificant.
The overall results of table 4.3.4, concludes that in subsectors of textile industry of
Pakistan, FCF and FS are significantly positive related with performance and FG also has
positive relationship with performance, but this relationship is insignificant. FL is significantly
34
4) RESULTS:
negative related with performance in the sub-sectors of the textile industry of Pakistan.
Following are the regression equations, define the relationship between free cash flow and
performance in the subsectors of textile industry of Pakistan, drawn from the LSDV model:-
1) Composite: ROA = -0.1889 + 0.2575FCF – 0.1275FL + 0.0468FS + 0.0145FG

2) Spinning: ROA = -0.1830 + 0.2575FCF – 0.1275FL + 0.0468FS + 0.0145FG
3) Weaving: ROA = -0.1742 + 0.2575FCF – 0.1275FL + 0.0468FS + 0.0145FG
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5) DISCUSSION
5) DISCUSSION
This section deals with the discussion on results of this study. This study based on
secondary data which has obtained from financial statements of purposively selected 67 sample
textile companies; comprised in 21 composite, 40 spinning and 6 weaving companies; listed in
PSX. To find the impact of free cash flow on performance of the entire textile industry of
Pakistan fixed effect model for multiple regression analysis is used and for testing the same
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relationship in sub-sectors of textile industry of Pakistan, least square dummy variable model has
been used. In this section entire industry results as well as subsectors results are discussed.
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The fixed effect regression results shows that there is significant positive relationship
between FCF and ROA. Earlier studies (Ambreen & Aftab, 2016; Habib, 2011; Kamran et al.,
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2017; Nakhaei & Jafari, 2015; Nobanee & Abraham, 2017; Wang, 2010) proved the positive
relationship between free cash flow and performance. This study also produced the same results
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as above mentioned studies and rejects the free cash flow hypothesis stated by Jensen (1986).
This shows that Pakistani textile firms are not making sufficient investments to increase their
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performance. This may be because of energy crises, increasing cost of raw materials, increasing
cost of replacement of plant and machinery and less spending in operating activities. In the
present situation textile firms have to re-consider their capital expenditures and investments in
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property plant and equipment, this leads to increase in operational activities of textile firms
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through use of more materials into process and employ more labours not only for manufacturing
purposes but also for selling purposes. The FL is significantly negative related with ROA in
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entire textile industry of Pakistan. Earlier studies (Nobanee & Abraham, 2017; Wen, 2017) also
proved the same results. According to free cash flow hypothesis, the FL is positively related with
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performance, because debts increases finance cost, which leads to reduce free cash flow in the
hands of managers and resulting into decreased agency cost and ultimately increases
performance. The negative relationship between performance and FL contrary to free cash flow
hypothesis and showed that debt is not fully utilized to increase operating activities, it may rather
use for payment of existing obligations. FS has insignificant positive relationship with ROA in
textile industry of Pakistan. The results of positive relationship between firm size and
performance are in line with the studies (Ambreen & Aftab, 2016; Heydari et al., 2014; Kamran
et al., 2017; Nakhaei & Jafari, 2015), while, result of insignificant relationship between firm size
and performance are in line with the studies (Nobanee & Abraham, 2017; Parsian & Koloukhi,
36
5) DISCUSSION
2014). FG has an insignificant positive relation with performance in textile industry of Pakistan;
the results are in line with earlier studies (Ahmad et al., 2017; Nobanee & Ellili, 2015).
From LSDV regression results it is observed that there is significant positive relationship
between FCF and ROA in sub-sectors of textile industry of Pakistan. The earlier studies
(Ambreen & Aftab, 2016; Habib, 2011; Kamran et al., 2017; Nakhaei & Jafari, 2015; Nobanee &
Abraham, 2017; Wang, 2010) proved the positive relationship between free cash flow and
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performance. This study also produced the same results as above mentioned studies and rejects
the free cash flow hypothesis stated by Jensen (1986) in subsectors of textile industry of
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Pakistan. The FL is significantly negative related with ROA in each subsectors of textile
industry. The earlier studies (Nobanee & Abraham, 2017; Wen, 2017) proved the negative
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relationship between financial leverage. The negative relationship between performance and FL
in subsectors of textile industry of Pakistan is contrary to the free cash flow hypothesis of Jensen
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(1986). The FS has significant positive relationship with ROA in subsectors of textile industry of
Pakistan. The results of positive relationship between firm size and performance are in line with
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the studies (Ambreen & Aftab, 2016; Heydari et al., 2014; Kamran et al., 2017; Nakhaei &
Jafari, 2015). The FG is insignificant positive related with ROA in subsectors of textile industry
of Pakistan. The results of insignificant relationship between firm growth and performance are
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in line with earlier studies (Ahmad et al., 2017; Nobanee & Ellili, 2015). It isobserved from
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descriptive statistics of subsectors that the spinning sector has lowest FCF mean and this sector
also has lowest ROA mean. It shows that this sector is consuming FCF more in capital
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expenditures and investments; and consuming high amount of debt which shows serious
financial crunch in this subsector. On the other hand weaving sector has highest mean value of
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FCF and FL; which shows that in this sector mostly part of FCF is consuming to pay the finance
cost. Furthermore; the highest constant value of this subsector shows its better performance than
other two subsectors. However; there is positive relationship between FCF and performance in
each subsectors; which shows problem of under-investment in each subsector.
The overall results of this study conclude that there is significant positive relationship
between FCF and performance in entire textile industry of Pakistan and in its subsectors, while
FL has significant negative relationship with performance in entire industry and its subsectors.
FS has positive relationship with performance but this relationship is insignificant in entire
37
5) DISCUSSION
textile industry. FG is positive related with performance in entire textile industry and in its
subsectors but this relationship is insignificant. Hence, the hypothesis of this study that there is
significant relationship between free cash flow and performance in sub-sectors of textile
industry of Pakistan is accepted and the free cash flow hypothesis ofJensen (1986), is rejected in
entire textile industry as well as in its sub-sectors.
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UA
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38
6) SUMMARY / CONCLUSION:
The term free cash flow is introduced by Jensen (1986), and has gained much popularity
among businessmen, investors and scholars during last two decades. Several studies have been
conducted on this topic in international level but in Pakistan, this topic is little explored. Due to
the importance of this topic in Pakistani textile industry, the aim of this study to determine the
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relationship between free cash flow and performance in sub-sectors of textile industry (i.e.
composite, spinning and weaving) of Pakistan in the light of free cash flow hypothesis stated by
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Jensen (1986). For this purpose six years data of textile companies listed in PSX, have been
collected and analyzed.
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According to free cash flow hypothesis of Jensen (1986) there is a negative relationship
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between free cash flow and performance due to the agency relationship between shareholders
and managers. The results of this study are contrary to the above hypothesis and found the
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significant positive relationship between free cash flow and performance in entire textile industry
of Pakistan as well as in sub-sectors (i.e. composite, spinning and weaving) of this industry.
Jensen (1986) also stated that the financial leverage reduces the amount of free cash in the hand
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of managers resulting in agency cost would be mitigated and increases performance. The finding
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of this study is also opposed the said statement, which results into significant negative
relationship between financial leverage and performance in entire textile industry of Pakistan as
well as in sub-sectors of this industry. The firm size has positive impact on performance in entire
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textile industry and as well as in its subsectors, but this relationship is insignificant in entire
textile industry. The firm growth has positive relationship with performance but insignificant in
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entire textile industry and as well as in subsectors of this industry. The results of this study are in
line with international studies (Habib, 2011; Nakhaei & Jafari, 2015; Nobanee & Abraham,
2017; Nobanee & Ellili, 2015; Parsian & Koloukhi, 2014; Wang, 2010; Wen, 2017) and with
Pakistani studies (Ambreen & Aftab, 2016; Kamran et al., 2017).
It is concluded that free cash flow, firm size and firm growth of the entire textile industry
and of subsectors are positively related with performance while the financial leverage is
negatively related with performance. Hence, the hypothesis of this study that there is significant
relationship between free cash flow and performance in the sub-sectors of textile industry of
39
Pakistan is accepted and furthermore; the finding of this study did not support the free cash flow
hypothesis stated by Jensen (1986).
6.1) RECOMMENDATIONS:
1) The positive relationship between free cash flow and performance recommends that
generally Pakistani textile firms and specifically weaving firms may re-consider their
capital expenditures and increase investments in property, plant and equipment. This will
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leads to increase in operational activities of textile firms through use of more materials
into process and they may employ more labor not only for manufacturing purposes but
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also for selling purposes.
2) The negative relationship between financial leverage and performance recommends that
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the debts may be used in operating activities rather than payment of existing liabilities of
textile industry.
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3) The government may announce bailout packages to cover up financial crunch generally
for entire textile industry and specifically for spinning sector because this subsector has
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lowest ROA.
4) The government and regulatory authorities may explore more foreign markets for
Pakistani textile products to improve their performance and operating cash flows.
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6.2) LIMITATIONS:
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1) This study covers period of six years (2012 to 2017), results of this study may not remain
valid for further six years, due to many macro-economic factors, which are rapidly
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changing in Pakistani economy.

2) This study is based on the textile companies listed in PSX, the unlisted textile firms are
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not considered.
6.3) FURUTRE RESEARCH:

1) Future research may be conducted on the same topic for other sectors of economy such as
oil and gas sector, cement sector, automobile sector, and telecommunication sector etc. or
by introducing more variables. Moreover, an increased time period for this topic may also
provide significant results for sub-sector.
40
7) REFERENCES:
7) REFERENCES:
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http://www.customstoday.com.pk/problems-of-textile-sector-2/
Ahmad, Muhammad Fawad, Ishtiaq, Muhammad, Hamid, Kashif, Khurram, Muhammad Usman,
& Nawaz, Ali. (2017). Data Envelopment Analysis and Tobit Analysis for Firm Efficiency in
Perspective of Working Capital Management in Manufacturing Sector of Pakistan. International
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AKUMU, OJODE CHRISTINE. EFFECT OF FREE CASH FLOW ON PROFITABILITY OF
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SI
Ali, Shaukat, Ullah, Mishkat, & Ullah, Nazir. (2016). DETERMINANTS OF CORPORATE
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Ambreen, Sadaf, & Aftab, Junaid. (2016). Impact of Free Cash Flow on Profitability of Firms
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Arshad, Zubair, & Gondal, Muhammad Yasir. (2013). Impact of working capital management on
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Research in Business, 5(2), 384-390.
ATA ÜNAL, Levent, & Aybars, Aslı. (2017). IS EXCESS FREE CASH FLOW OVER-
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Audretsch, David B, & Elston, Julie Ann. (2002). Does firm size matter? Evidence on the impact
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Awan, Abdul Ghafoor, Shahid, Pervaiz, Hassan, Jahanzeb, & Ahmad, Waqas. (2014). Impact of
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Berle, Adolf A., & Means, Gardiner C. (1932). The Modern Corporation and Private Property:
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Brealey, Richard A., Myers, Stewart C., & Marcus, Alan J. (2012). Fundamentals of Corporate
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Brush, Thomas H., Bromiley, Philip, & Hendrickx, Margaretha. (2000). The Free Cash Flow
Hypothesis For Sales Growth And Firm Performance. Strategic Management Journal, 21(4),
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Chu, Junhong. (2010). Agency Cost under the Restriction of Free Cash Flow. Journal of Service
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Dechow, Patricia M., & Ge, Weili. (2006). The Persistence of Earnings and Cash Flows and the
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Economic Adviser’s Wing, Finance Division, Government of Pakistan, Islamabad. (2017).
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Habib, Ahsan. (2011). Growth opportunities, earnings permanence and the valuation of free cash
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Harford, Jarrad. (1999). Corporate cash reserves and acquisitions. The Journal of Finance, 54(6),
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Heydari, Iman, Mirzaeifar, Milad, & Javadghayed, Mohammad. (2014). Investigating The
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APPENDIX -A: LIST OF SAMPLE COMPANIES
Industry Sub Sector Company Name Symbol

Series Series
Composite Sector
1 1 Artistic Denim ADMM
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2 2 Ahmed Hassan AHTM
3 3 Azgard Nine ANL
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4 4 Bhanero Tex. BHAT
5 5 Blessed Tex. BTL
6 6 Crescent Tex. CRTM
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7 7 Faisal Spinning FASM
8 8 Gul Ahmed GATM
9 9 Hala Enterprise HAEL
10
11
10
11
Jubilee Spinning
Kohinoor Mills
IV JUBS
KML
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12 12 Mehmood Tex. MEHT
13 13 Masood Textile MSOT
14 14 Nishat (Chun.) NCL
15 15 Nishat Mills Ltd NML
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16 16 Quetta Textile QUET

Reliance Weaving REWM
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17 17
18 18 Sapphire Tex. SAPT
19 19 Sapphire Fiber SFL
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20 20 Shams Textile STML

21 21 Suraj Cotton SURC
Spinning Sector
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22 1 Asim Textile ASTM

23 2 Allawasaya Tex AWTX
24 3 Babri Cotton BCML
25 4 Bilal Fibres BILF
26 5 Crescent Cotton CCM
27 6 Crescent Fibres CFL
28 7 DewanFarooque Sp. DFSM
29 8 Dewan Khalid DKTM
30 9 DewanMushtaq DMTM
31 10 Dewan Textile DWTM
32 11 Elahi Cotton ELCM
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33 12 Ellcot Spinning ELSM

34 13 Fazal Cloth FZCM
35 14 Gadoon Textile GADT
36 15 Glamour Textile GLAT
37 16 Hira Textile HIRAT
38 17 Idrees Textile IDRT
39 18 Indus Dyeing IDYM
40 19 Island Textile ILTM
TY
41 20 J.A.Textile JATM
42 21 Janana D Mal JDMT
J.K.Spinning JKSM
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43 22
44 23 Kohat Textile KOHTM
45 24 Kohinoor Spining KOSM
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46 25 Maqbool Textile MQTM
47 26 Mukhtar Textile MUKT
48 27 Nagina Cotton NAGC
49
50
28
29
Nadeem Textile
N. P. Spinning
IV NATM
NPSM
51 30 Reliance Cotton RCML
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52 31 Saif Textile SAIF
53 32 Salfi Textile SALT
54 33 Salman Noman SANE
55 34 Shadab Textile SHDT
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56 35 Sajjad Tex. SJTM

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57 36 Sally Textile SLYT

58 37 Sana Industries SNAI
59 38 Sargoda Spinning SRSM
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60 39 Saritow Spinning SSML

61 40 Shahzad Tex. SZTM
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WeavingSector
62 1 Feroze 1888 FML
63 2 I.C.C.Textile ICCT
64 3 Prosperity Weav PRWM
65 4 Shahtaj Textile STJT
66 5 Yousuf Weaving YOUW
67 6 Zephyr Textile ZTL
46
APPENDIX- B: REGRESSION RESULTS WITH RELATIVE SIZE OF FIRM
APPENDIX- B: REGRESSION RESULTS WITH RELATIVE SIZE OF FIRM

{R2 = 0.1872; F=12.04; P>F=0.0000
ROA=-0.175+0.233FCF-0.188FL+0.013FG – 1.703RSI
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Constant 0.1754488 0.0440102 3.99 0.000
FCF 0.2332131 0.0634336 3.68 0.000
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FL -0.1882969 0.0729593 -2.58 0.012
FG 0.0125709 0.0103604 1.21 0.229
RSF -1.702679 0.6436834 -2.65 0.010
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Note: ROA= Return on Assets; FCF= Free cash flow; FL = Financial leverage; FG= Firm growth; RSF= Relative
size of firm
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UN
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UA
RT
VI
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IMPACT OF FREE CASH FLOW ON PERFORMANCE OF

TEXTILE INDUSTRY IN PAKISTAN: A TEST OF FREE CASH

Name: Zohaib Fareed

BUSINESS ADMINISTRATION (FINANCE)

VIRTUAL UNIVERISTY OF PAKISTAN

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF

REQUIREMENTS FOR THE DEGREE

VIRTUAL UNIVERISTY OF PAKISTAN

The Controller of Examinations,

3.2) RESEARCH PARADIGM:...........................................................................................................................12

3.4) POPULATION AND SAMPLE FRAME:....................................................................................................12

3.7) DATA COLLECTION TOOLS: ..................................................................................................................13

3.8.2) Independent Variable:-............................................................................................................................13

4.2) INDUSTRY RESULTS:.................................................................................................................................25

Table 3.8.1 Variable and Measures………………………………………………………... 15

Table 4.3.4 LSDV Regression Results of Subsectors of Textile Industry in Pakistan…..34

FCF = Free Cash Flow

ROA = Return on Assets IV

VIF = Variance Inflation Factor

1.2) RESEARCH PROBLEM:

1.4) SIGNIFICANCE OF THE STUDY:

1.5) RESEARCH OBJECTIVE:

To identify impact of free cash flow on performance of textile industry in Pakistan.

i. Free Cash Flow Hypothesis

iii) Studies Contrary to the Free Cash Flow Hypothesis:

and stock returns when earning are transitory.

Hypothesis: There is a significant relationship between free cash flow and

2.3) THEORETICAL FRAMEWORK:

2.4) THEORETICAL MODEL:

ROA = Return on assets

3.1) TYPE OF RESEARCH:

analysis) is structured (Saunders et al., 2009).

3.4) POPULATION AND SAMPLE FRAME:

3.5) SAMPLE SIZE AND SAMPLING TECHNIQUE:

i. Companies must be in trade during the financial year 2012 to 2017.

3.6) DATA COLLECTION SOURCES:

data collection tool.

3.8) DEFINITION & MEASUREMENT OF VARIABLES:

3.8.1) Dependent Variable:

ROA = Earnings before interest and taxes / Total assets

3.8.2) Independent Variable:-

FCF = [EBIT (1-tax) + depreciation + amortization – change in working capital

– capital expenditures] / Total assets

3.8.3) Control Variables:-

FL = Total debt / Total assets

ii) Firm Size (FS):

iii) Firm Growth (FG):

FG = (Current year sales – Previous year sales) / previous year sales

and measurement, used in this study:-

Table 3.8.1: Variables and Measures:

Variables Nature Symbol Definition Measure

capital providers. interest and taxes /

Firm growth Control FG Expansion of business FG = (Current year

3.9) DATA PROCESSING, ANALYSIS TECHNIQUES AND INTERPRETATION:

Fixed vs Random Effect Model:

Fixed Effect Model Random Effect Model

Least Square Dummy Variables (LSDV) Model:

Variable Mean Standard Minimum Maximum Numbers

Table 4.1.2 Descriptive Statistics of Composite Sector

Variable Mean Standard Minimum Maximum Numbers

Financial 0.5412356 0.1865975 0.2125157 0.9878221 21

Firm growth 0.0794294 0.9105679 (0.9553165) 9.95664 21