Literature Review Sample

South Asia has not yet got much development in the bond market; therefore, many firms of south Asia give preference to equity or internal financing in comparison to debt, but one day when this negative relationship between profitability and leverage of the firm will be removed, the south Asian firms will realize the importance of debt financing, because it is the debt financing which increases the value of the firm and the wealth of the share holders (Ilyas. 2000).

Study conducted (Rafiq, et al., 2008); it has been observed that the chemical sector of south Asia gives preference to equity over debt and large firms borrow more debt because they have no fear of bankruptcy whereas small firms are afraid of more debt because of the fear of bankruptcy. In chemical sector huge cash flows are needed, therefore, the chemical industry of South Asian uses more debt than equity to finance the new projects because the internal sources are not enough for a new firm, therefore, it depends on the debt because the fixed direct costs of bankruptcy constitutes a smaller portion of the total value the firm. The other reason for which most of south Asian firms prefer to equity or internal financing over debt is that the bankruptcy process is slow an ineffective in Pakistan due to which firms face no or low bankruptcy costs.   

Study conducted by (Chen et al., 2009) in insurance industry Taiwan, to know the relationship among capital structure, operational risk, and profitability. Factor analysis and path analysis methodologies used to examine correlation among the capital structure, operational risk, and profitability sample of listed insurance companies in America was also taken. Result of research was firms values is not related with capital structure, a close relationship shown among operational risk, profitability, capital structure. Capital structure is negatively related with profitability if equity ratio increases or reserve-to-liability ratio decreases which result in higher profits. Capital structure has negative relationship with operational risk, same relationship between the operational risk and firm’s profitability