FINANCIAL ECONOMICS has made significant progress inasset management, the coordination between firms cash inflows with cash outflows by matching the maturity of income generated by assets with the maturity of interest incurring debts. We know little about the maturity structure of firm's assets and liabilities, because readily available and detailed information about a firm's debt and debt like obligations is difficult and time-consuming to collect in our country, while many papers have explained how imbalances in the asset and liability structure of emerging markets can cause currency and financial crises, the factors that create such imbalances in the first place have established comparatively little attention so far.
The objective of my study is to contribute to filling the gap of maturity mismatch between firm's assets and liabilities. We show theoretically how mismatch may lead to and exacerbate maturity mismatch due to market uncertainty, and how maturity mismatch increases output instability in the cement sector. Second, we provide empirical results that support the predictions that firm's debt maturity is positively related to maturity of its assets to test this prediction I will make the model which depend on the following variable like debt maturity ratio, asset maturity ratio, market to book value ratio, and firm size.
A common recommendation is that a firm should match the maturity of its liabilities to that of its assets. If debt has a shorter maturity than assets, there may not be enough cash on hand to repay the principal when it is due. Alternatively, if debt has a longer maturity, then cash flows from assets cease, while debt payments remain due. Maturity matching can reduce these risks and is therefore a form of corporate hedging that reduces expected costs of financial distress. In a similar vein, Myers (1977) argues that maturity matching can control agency conflicts between equity holders and debt holders by ensuring that debt repayments are scheduled to correspond with the decline in the value of assets in place. In a model of this phenomenon, Chang (1989) demonstrates that maturity matching can minimize agency costs of debt financing. The empirical hypothesis is that debt maturity is positively related to asset maturity(Mark Hoven Stohs and David C. Mauer 1996).
We also find strong support for the standard textbook prescription that firms should match the maturity of their debt to that of their assets. Our tests indicate that asset maturity is an important factor in explaining both cross-sectional and time-series variation in debt maturity structure (Mark Hoven Stohs and David C. Mauer 1996).
The sample of firms is taken from cement sector of Pakistan and their financial data consisting from year 2004 to 2008 and those firms are used to analyze the distinctive financial characteristics. The reasons for choosing cement sector because it plays significant role in the economy of our country and the measurement of maturity matching of assets and liabilities would help this sector to avoid risks like liquidation and changing in interest rates. For example, if the duration of the maturity of assets is greater than the duration of the maturity of its liabilities, then the maturity structure is at risk to rising interest rates. This is because the higher duration assets are more sensitive to interest rates than the lower duration liabilities. Should interest rates rise, the assets will decline in value more quickly than the liabilities will. If interest rates remain at that level, there may be a shortfall in funding the liabilities. One way to lessen this problem is to rebalance the assets such that the duration of the assets is equal to the duration of the liabilities, then any interest rate change has a negligible effect. If, in the case above, the asset maturity duration is too high, the duration must be reduced. This reduction may be accomplished by either rebalancing the structure with shorter duration assets or by shorting longer duration assets, and if the firm's debts and debt like obligations are greater then its assets in amount then this mismatch between the maturity of assets and liabilities can lead then towards liquidation so to avoid that liquidation the firms should maintain matching between the amount of its assets and liabilities. This is a prime example of the benefit that cement sector can acquire from my study by matching the maturities of its assets to that of its liabilities.
Statement of the Problem:
The objective of my study is to contribute to filling the gap of maturity mismatch between firm's assets and liabilities. We show theoretically how mismatch may lead to and exacerbate maturity mismatch due to market uncertainty, and how maturity mismatch increases output instability in the cement sector.
Model/Framework to be used:
DEBMAT =α+ ASSETMAT (β1) + SIZE (β2) + MV/BV (β3) + μ
Where:
DEBMAT is Firm's Debt Maturity (Debt maturing more then one year / Total Debt)
ASSETMAT is Firm's Asset maturity (Fixed Assets / Depreciation )
SIZE is Firm Size ( Log (natural) of total assets )
MV/BV is Market-to-Book Ratio ( Market value of firm's assets / Book Value of firm's assets )
µis error term
α is the Constant
Variable to be Studied:
The dependent variable is Debt Maturity (DEMA) and the all other independent variables are Asset Maturity, Firm Size, and Market to Book Ratio.
Proposed Research Hypothesis:
H1: Debt maturity is positively related to asset maturity (Mark Hoven Stohs and David C. Mauer 1996).
Sources of Information:
The data will be collected from the Stock Market, State Bank of Pakistan and other internet sources.
Sampling Technique &Procedure :
All the firms are selected from cement sector for the purpose of conducting the research study.
Sample Size:
Sample for my study has been taken from "Balance Sheet Analysis of cement sector Joint Stock Companies Listed on the Karachi Stock Exchange (2003-2008)".
Method of Data Collection &Procedure:
Secondary data will be collected from SBP's website and it is also available in published form.
Instrument/s of Data Collection:
The secondary research will be conducted through the following instruments:
Internet
Newspapers
Books
Statistical Tests to be used:
The Regression Analysis Technique will be used to test the hypothesis.
Possible Research Findings:
The forecasted results of my study would be that the larger and less risky firms with longer-term asset maturities would use longer-term debt and shorter-term asset maturities use shorter-term debt to avoid the risk of mismatch. This means that we can expect positive relation between debt maturity and asset maturity of firm.
