Impact on investments due to free cash flows - Free Essay Example

CHAPTER 1 Introduction Background Maintaining suitable amount of liquidity within the firms was found to be fundamental for the smooth operations of firms. Managers had a propensity to hold large percentage of firm assets in the form of cash and cash equivalents in order to reinvest on other physical assets, payments to stockholders and to keep cash inside the firm (Almeida, Campello, S. Weisbach, 2004). The level of cash a firm maintains was described by its policies regarding capital structure, working capital requirements, cash flow management, dividend payments, investments and asset management (C.Jensen, 2000) broadly defines free cash flow as cash flow in excess of what is required to fund positive NPV investments. Free cash flow is a sign of agency problems because excess cash may not be returned to shareholders. (J. Brailsford Yeoh, 2004) When firms have free cash, any acquisitions made by these firms are, by definition, negative net present value. 1.2 Importance of the study A number of investment studies have demonstrated that cash flow is an effective way to predict investment. There are three primary interpretations of this relationship. The first states that a surge in company cash flow is a good indicator of an increased availability of valuable investment projects. The second interpretation argues that companies already know about potential investment opportunities, but are prevented from investing because of limited access to external sources of financing. As cash flow improves, companies are able to partake of attractive opportunities that would be otherwise unavailable. The third, known as the free cash flow theory, asserts that managers do not behave in a manner consistent with profit maximization, as the first two interpretations suggest. Managers instead use increased cash flow to pursue objectives that have little to do with increasing profits and a great deal to do with making the managers lives better (such as increasing the size o f their company), or easier. Purpose The purpose of this study is to find out the impact on investments due to the fluctuation in free cash flows. The study focuses on determining the performance of investments due to free cash flows using financial statement data of Pakistani companies in different sectors using regression analysis. Moreover, the behavior of different factors affects a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s cash holdings. Several studies e.g. the study by (A. Gentry, Newbold, T. Whitford, 1990) shows that the greater cash flow permits more investment, but also raises the threshold required to justify investment. Beneficiary Pakistani firms can be efficiently benefited with this research because it is seen that Pakistani firms hold a considerable amount of assets in the form of cash and cash equivalents and the trend is found in all firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ sizes. Problem Statement Managers have a tendency to hold large proportion of firm assets in the form of cash and cash equivalents in order to reinvest on other physical assets, payments to stockholders and to keep cash inside the firm (Almeida, Campello, S. Weisbach, 2004). The problem related to free cash flow arrived when it was started getting observed that the managers do not go for the benefits of share holders rather they hold cash and work for their benefits and prefer the bonuses and internal projects and in turn go for negative NPV projects through the free cash flows.. In this way, they were started taken care of through the share holders and the thesis can help them do so. The study also focused commonly that in Pakistan the firms which pay low dividends have considerable cash holdings. (Afza Adnan, 2006). 1.6 Thesis Organization We are going to present the thesis on free cash flows and investments on capital expenditure relationships. In the thesis we have discussed the background of the study as well as the importance of the study, we have clearly showed the purpose of the study and who ever will be benefited. Then we have presented the literature will shows the past studies that have focused on the same topic and variables. Then we have clearly showed the variables and the statistical technique which we have used is regression. We have then showed the results accordingly. Summary and Conclusion Growing free cash flows are commonly due to increased earnings. Companies that experience increasing FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination can reward investors tomorrow. That is why the investment considers FCF as a measure of value. But decreasing FCF is a sign of danger ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business. The objective of our study is to find out the impact on investments due to the fluctuation in cash flows. We also observe that the cash flow increases sales growth and sales growth increases performance of firms. LITERATURE REVIEW Production Efficiency and Agriculture Productivity The research by Taylor, Drummond Gomes (1986) related to eff ectiveness of subsidized credit programs in improving the productivity of traditional farmers in developing countries the credit program known as PRODEMATA. The empirical results suggested that PRODEMATA had no desire impact on technical efficiency and a slightly negative effect on ALLOCATIVE productivity (it was defined as a theoretical measure of the advantage or utility resulting from a planned or actual choice in the distribution or distribution of resources). Murgai, Ali Byerlee (2001) analyzed the efficiency and the production system for both Pakistani and Indian Punjabà ¢Ã¢â€š ¬Ã¢â€ž ¢s the both Punjabà ¢Ã¢â€š ¬Ã¢â€ž ¢s were providing enumerating developments towards the origination of green revolution. It was analyzed that the productivity of the Indian side of Punjab was extremely more efficient than that of the Pakistani Punjab the reasons behind were the yields of main cash crops in which Indian Punjab was leading away and Pakistani Punjab was very far away and produci ng low yield. If the yield output of both cash crops of Pakistani and Indian Punjab has been compare the results shows that the growth rate of the Indian Punjab was 11.03% as compare to 3.08% of Pakistani Punjab for rice. The analysis of the expert revealed some factors which are the main causes for the productivity discrepancy. The main causes that lower the productivity performance are the cropping intensity the level of input, the quality of resources and the implementation of technology. In a research Looney (1994) suggested that over the past decade, the agriculture sector undergone major technological and policy transformations. By introducing technical changes offering production incentives, and increasing the availability of fertilizer, water, and credit, Pakistan increased it was exportable surplus of cotton and became close to self-sufficiency in wheat. For the 1980-88 periods the corresponding figure was 4.3 percent, up from 3.3 over the 1965-80 periods. Since then overal l growth had been maintained at similar levels. As in most semiarid developing countries, however, considerable variations existed in annual and seasonal production owing to adverse weather, pest incidence, and uncertain irrigation supply. In the study Butz (1945) suggested that agriculture credit is most effective after a war if the following problems are solved first is avoidance of another land boom which creates some unmanageable debt burdens secondly there should be different standards for à ¢Ã¢â€š ¬Ã…“soundà ¢Ã¢â€š ¬? and à ¢Ã¢â€š ¬Ã…“softà ¢Ã¢â€š ¬? credit thirdly a mechanism should be implemented so the qualified operators can borrow à ¢Ã¢â€š ¬Ã…“soundà ¢Ã¢â€š ¬? credit with less than 50 percent equity. Fourth is the accomplishment of desirable adjustments in credit terms. Fifth is part time farmers should be provided with credit facilities. Sixth credit should be disbursed for land development. Seventh steps should be taken to resolve the problems for low income farmers. And finally extension of the concept among bankers and bank examiners that liquidity of agricultural paper is more a function of repayment ability than of the maturity date on the note. In a research by Brinser Wheeler (1948) the author studied the factors of farm planning that are responsible for better agriculture credit utilization with minimum of social and physical loss and also studied the credit lending policy. There is an un-bridged gap between agriculture credit and practices of the banking system the author studied the factors that reduces that gap using farm planning the results of the research suggested that for better farm planning for better agriculture credit utilization it should be understand define what the right kind of credit may be; and second, to determine whether the American banking system can accept the kind of security on which such credit could be extended. Also it should be understand and find accurate measure of earning capacity technique for determining what a farmer can do with the resources of his farm. In the study Adams (1971) suggested that for the efficient use of agriculture credit there are two combinations which should be followed first is the technical help in planning for the use of a loan, and second is the use of the loan funds subsequently, with the making of the loan. The research also suggested that commercial banks that are scattered all over the country can play major role in servicing agriculture credit but there should be separate system or banks which are only considering agriculture credit servicing. The author also suggested three policies the better use and utilization of agriculture credit first is timing of providing the loans the agriculture loans should be provided first on the more de-stabilization the farmer which is more destabilized should be entertained first so he can be able make production in a stabilized condition as quick as possible. Second is the function of public credit most imp ortant function of public credit is to develop improved types of loans and methods which private agencies can later adopt. It seems to be in the nature of agricultural credit that competition among private lenders does not bring about the improvements needed, or brings them about too slowly. It is significant in this connection that the most successful and forward agricultures in the world depend on credit more than do the distressed and back-ward agricultures. Finally the intermediate credit evenly important because these type of loans of the intermediate type, for a term of one to three years usually, for the purpose of buying cattle and farm machinery and making minor building and land improvements and the like, be put on a sound basis before the next depression. In a research Narasimham (1971) suggested that the commercialization of agriculture and its certain capacity to break out of the vicious circles of low production and less investment has been result of the adoption, over an increasing area, of recent techniques centered around assured water, wider use of fertilizers and increased adoption of high yielding seeds. Also agriculture credit is scarce resource How much, in other words, of agricultural credit should be disbursed is related not only to what the agricultural economy needs but also what other sectors of the economy requirement in the light of how much there is to go round. Given the resources constraint, an increase of credit to one sector means fewer credit elsewhere. New technology new techniques to enhance agriculture productivity but it require investment, without finance the desire to apply the modern technology cannot be translated in action. In the research Hathaway (1957) studied the examined the possibility of the use of selective credit restraints by some centralized authority to reduce inputs in agriculture and thereby reduce output and surpluses. The results of the research suggested that selective credit restraints could not be desirable to achieve this end. The author tend to agree generally with his conclusions on this topic, but for somewhat different reasons. In the study Adams (1971) the author studied the shortage of agriculture credit in Latin America the results suggest that credit bottlenecks may be occurring where the modernization process is most intense and especially among small farmers. The results also suggested that that credit requirements dramatically increase when new technology is used. Additional fertilizer purchases, changes in irrigation systems, and more employed labor associated with use of new seed varieties may the author suggested following issues that should be emphasized to overcome credit shortage first interest rates on agricultural credit do not reflect opportunity costs of capital, high priority should be given to raising rates. Market forces should have more sway in the allocation of these funds. Higher rates could likely enable small farmers to get and use more credit as large operators back away from credit with higher costs. Increased rates could also allow credit institutions to protect the real value of their loan portfolios and make them less dependent on external funding. More realistic interest rates could also encourage the growth in nongovernmental credit. In the study Frey (1955) the author studied the possibilities possibility-that farmers were averse to borrowing in order to make farm adjustments-data from several studies suggested that this may have been an influential factor the results of the research suggested that the reluctance of farmers to use credit for farm adjustments apparently stems, to a large extent, from other considerations. These include their uncertainty as to future prices and yields and as to their ability to succeed at a different type of farming; their unwillingness to adopt systems of farming that could require them to perform tasks such as milking cows or caring for beef cattle; and tenure arrangements or pla ns for the future that give them little interest in possibilities for long-run gain compared with their interest in immediate income. The age and health of the farmer are factors in all of these considerations. In the study Feder (1990) emphasized on the two main factors which are responsible when analyzing the impact of agriculture-credit on agriculture productivity. The author analyzed that all of the farmers are not affected by insufficiency of credit but occasionally and marginal are affected by agriculture credit. Secondly if the agriculture credit is more useful if the formal schemes of agriculture should be developed. By the use of formal credit the effect can be greater because it is consumed where it is more needed at the right time. In the study Feder (1989) suggested that in rural areas the credit disbursed is more than half by the non-institutional sources. It is also analyzed that most of the researches in agriculture economics or agriculture credit one-third and two th irds non-institutional credit has been used. The reason of this type of credit used mostly it has no interest with it. These types of loans also have undecided legal status, and also had no collaterals. In the research Jodha (1981) suggested that Credit could play a major role in preventing the rather extreme measures of asset depletion and pauperization adopted by the farmers in drought years further the role of credit in risk minimization is discussed by the following factors. First is credit for drought proofing of the farming system to make it less vulnerable to risk. Secondly, credit for loss and risk minimization. Thirdly, there is also credit for loss management. The first category of credit indirectly strengthens the risk- minimizing and loss-management devices. This forms part of the general or wider strategy of resource transfers to drought-prone areas, and it is not indented to discuss here. Such credit need not come in response to actual or probable occurrence of drought s. The preference for kind loans during the droughts is also higher because, in the process, the borrowers minimize the risks of not finding goods already, in scarce supply. Production Efficiency and Agriculture Credit According to research done by Kahn (1994) on World Bank-its role in farm mechanization for the appropriate functioning of farm production main role is played by agriculture credit as a result of development in agriculture the farmerà ¢Ã¢â€š ¬Ã¢â€ž ¢s earnings can raise and can have its impact on his family and the community as a whole. Improvement of rural population and overall population in general is done a lot by Pakistan agriculture. If there is any project that has been designed for rural development the objective should be to promote the agriculture. This is important because the agriculture sector have more labor incorporation capacity as relates to other sectors. The implementation of newest technologies and the use of improved inputs and enterprise wh ich has changed the whole view of farm have given climb to an enlarged vital role has been played by World Bank for the increase in the demand of credit for agriculture. Financial services have lengthened substantially during the past four half decade especially in small earnings group society of Pakistan. Many new financial institutions which contain major boost in volume of formal loans have some steps toward mobilization of the resources which are local in the shape of monetary saving in the rural areas. The main purposes of these actions have been taken to increase agricultural production and to relieve rural poverty. Thus there is a rising recognition between Pakistani farmers of the effective of better inputs and use of newest technology on both agricultural yield and cropping. The main constraint in the mechanization of in Pakistan had been the paucity of foreign exchange and availability of standardized agricultural machinery. According to research by Lambert Bayda (2005 ) its states that Farm financial structure may influence equally long-run and short-run input usage, thus affecting farm efficiency. Any inefficiencies taking place due to the selection of inputs can be exaggerated over time as credit constraints continue to influence the usage of inputs. Farm financial needs included current-year borrowing to cover production costs; intermediate funds needed for equipment, machinery, and farm-improvement investments; and long-term capital required for investments in land and other real estate. Balancing internal and external sources of funds to cover farm costs may reflect farm financial targets, farm household income, farmer risk attitudes, credit constraints imposed by lenders, or the relative costs of internal versus external funds. According to research by Olagunju (2007) it was stated that Agricultural credit had long been identified as a major input in the development of the agricultural sector in Nigeria Credit determines access to all of th e resources on which Farmers depended. Consequently, provision of macroeconomic policies and enabling institutional finance for agricultural development had been directed to the provision of infrastructure capable of facilitating agricultural expansion with a vision to modifying the contribution of the sector in the generation of employment, income and foreign exchange. One of the reasons for the lowering of the contribution of agriculture to the economy was Lack of a formal national credit policy and paucity of credit institutions, which could assist farmers. Credit or loan able funds viewed as more than just another resource such as labor, land, equipment and raw materials. Therefore, by injecting capital into agriculture, it was possible to increase the rate of agricultural development since credit has frequently been considered as one of the main factors in overcoming agricultural stagnation that helps to expand farmland size and production. Credit facilities as well as the use of agricultural capital and labor Resources accelerate adoption process and expand the scale of production. It had been further ascertained that with the introduction of credit, the farmers could be able to make possible a better combination of resources that could be employed to facilitate an increase in resource productivity. RESEARCH METHOD Research Question R1: Is there a significant relationship between agriculture credit and development efficiency? R2: Is there a significant relationship between agriculture credit and production efficiency? Hypothesis Development H1: There is an association between agriculture credit and development efficiency. H2: There is an association between agriculture credit and production efficiency. Data Collection To evaluate relationship between agriculture and development and production efficiency data had been collected from State Bank of Pakistan for yield of 27 crops and loan data for four different provinces through 1990-2007 where yield is dependent variable the impact of agriculture credit on yield of different crops had been measured. Then for production efficiency loan data from different sources such as commercial banks ZTBL and State Bank of Pakistan. The impact of different types of loans on production efficiency has been measured and the data is taken for 31 crops for the four provinces of Pakistan. Statistical Technique To evaluate the relationship of variables the explanatory variables were regressed using Regression method called General Linear Model (GLM). In measuring impact of agriculture credit on development efficiency yield output of crops in Kg/hectare has been taken as dependent variable and independent variables were loan amount in million rupees, crops types 27 crops has been taken for four provinces of Pakistan. For evaluating the relationship between production efficiency and agriculture credit production output in thousand tones has been taken as dependent variable and independent variable is loan type there are four types of loan types, crops type there are 31 crops and loan amount in million rupees. Model Development for Development Efficiency COBB-DOUGLAS production function has been used to find the relationship between agriculture credit and both production and development efficiency. The traditional COBB-DOUGLAS production function Y = ALÃŽÂ ±KÃŽÂ ² Where Y=Production A=total factor productivity L=Labor K=Capital ÃŽÂ ²,ÃŽÂ ± are elascities for Labour and Capital Model for finding relationship of agriculture credit with development efficiency For the purpose of using COBB-DOUGLAS production function in this research the input and output variables used by traditional model i.e. prod uction, labor and capital were replaced by crop production, development loan, crop type and province the reason for taking these variables as proxy for traditional input variables used by COBB-DOUGLAS production function is that the input and output variables used in this research have same nature as the traditional COBB-DOUGLAS production function have. Now the model looks likes: Where Y=Yield DL=Development Loan CT=Crop type PR=Province ÃŽÂ ±,ÃŽÂ ²a,ÃŽÂ ²b are elascities for DL,CT and PR This equation is transformed into linear one to facilitate to use of General Linear Model method by taking logarithmic transformation. After making such a transformation the final equation is expressed as The reason for dropping all the variables other than development loan in the final equation is that the impact of development loan on development efficiency is calculated only. Therefore all the other variables than development loan are removed from the fina l equation. Model for Production Efficiency The model developed to find the relationship between agriculture credit and production efficiency again COBB-DOUGLAS production function is used with replaced variables. Now the Model looks likes: Where A=Total factor productivity P=Production PL=Production Loan CT=Crop type LT=Loan type YR=Year ÃŽÂ ±,ÃŽÂ ²a,ÃŽÂ ²b,ÃŽÂ ²c are elascities for PL,CT,LT and YR This equation is transformed into linear one to facilitate to use of General Linear Model method by taking logarithmic transformation. The reason for dropping all the variables other than production loan in the final equation is that the impact of production loan on production efficiency is calculated only. Therefore all the other variables than production loan are removed from the final equation. RESULTS AND ANALYSIS Results and Interpretation for Development Efficiency Table 4.1 Data Construction for Development Efficiency Method for testing GLM as has been used as the test method. GLM applies when there is a scale dependent variable and there is scale or categorical predictors. In this research dependent variable is yield used as scale variable and development loan a s scale independent variable and crop type, province are categorical variables used in the model in this research. Table 4.2 Tests of Between-Subjects Effects (Dependent Variable: lnyid ) Source Type III Sum of Squares df Mean Square F Sig. Partial Eta Squared Corrected Model 2055.885(a) 30 68.53 546.446 0 0.908 Intercept 661.856 1 661.856 5277.56 0 0.76 Province 31.727 3 10.576 84.328 0 0.132 Crops_Type 2029.412 26 78.054 622.396 0 0.907 Lnamt 0.655 1 0.655 5.219 0.022 0.003 Error 209.057 1667 0.125    Total 89799.913 1698     Corrected Total 2264.943 1697     Table 4.3 Parameter Estimates (Dependent Variable: lnyid)      95% Confidence Interval  Parameter B Std. Error t Sig. Lower Bound Upper Bound Partial Eta Square  8.197 0.094 86.786 0 8.011 8.382 0.819  0.033 0.014 2.285 0.022 0.005 0.061 0.003 After doing test the beta of intercept has been calculated which is the value of total factor productivity in COBB-DOUGLAS model originally that was à ¢Ã¢â€š ¬Ã…“Aà ¢Ã¢â€š ¬? in main equation which is 8.197 and it is taken as beta of lnamnt (loan amount) for development efficiency the value is 0.033. The equation derived from the results. Interpretation of results The final equation that the value of total factor productivity was 3630.0460 and beta for development loan was 0.033 which is greater than 0 now the interpretation of results was started from Tests of Between-Subjects Effects which is the first table specially focused on row 6 and row 7 which were significance or p value and Partial Eta Square in this case significant level at 5% has been taken so if any value of sig or p0.05 that variable was rejected to had any impact on yield or development efficiency and also Partial Eta. Square analyzed that how much change in the dependent variable is due to different independent variables on the individual basis. The intercept in this model which is total factor productivity in COBB-DOUGLAS model it seem to be significant F(1, 5277.560) p=0.000 (p0.05) and have Partial Eta Square of 0.760 or 76% so it means that total factor productivity is highly important for yield improvement because it explains 76% variati on in yield output. The most important variable is Development loan amount which is significant F(1,5.219) p=0.022 which is less than 0.05 so it is significant Partial Eta Square is 0.003 which 0.3% only which shows the minimum variation in yield output so its means that either loan amount disbursed in these years(year variable removed from the model due to that reason) 1990-2007 doesnà ¢Ã¢â€š ¬Ã¢â€ž ¢t vary too much according to needs and the policy for the development loans is not much efficient but it is still significant also loan type is not significant means that loans disbursed for different purposes like tractors, water logging, land leveling etc. doesnà ¢Ã¢â€š ¬Ã¢â€ž ¢t have much impact on yield output. Second is Province which is also significant F(3,84.328) p=0.000 and Partial Eta Square is 0.132 which 13.2% which is also high explanation in dependent variable (yield) and development efficiency so it means that loan provided has a positive effect on yield but not in significant in explaining yield differential in different provinces. Third is Crop Type which is significant F(26,622.396) p=0.000 and Partial Eta Square is 0.907 which 90.7% which is highest variation explained by Crop Type means that for development efficiency or increase in yield growth crop type plays vital role. Results and Interpretation for Production Efficiency Table 4.4Data Construction for Production Efficiency Code Variable Unit Of Measurement Descriptions Production Production Output Thousand Tones Production of different crops CT Crop Type Nill Types of crops used in this analysis there are 31 types of crops are used this analysis Crop Types were: Cash Crops Edible Oilseeds Food Crops Pulses Vegetables YR Year Nill Years of production data has been taken 1990-2007 PL Production Loan million Rs. Loan issued for increasing production efficiency Table 4.5Tests of Between-Subjects Effects (Dependent Variable: LnProduction) Table 4.6 Parameter Estimates (Dependent Variable: LnProduction)      95% Confidence Interval    Parameter B Std. Error t Sig. Lower Bound Upper Bound Partial Eta Square Noncent Parameter Observed Power(a)  -0.208 0.114 -1.824 0.068 -0.431 0.016 0 1.824 0.446  0.262 0.006 42.774 0 0.25 0.274 0.123 42.774 1 After doing test the beta of intercept has been calculated which is the value of total factor productivity in COBB-DOUGLAS model originally that was à ¢Ã¢â€š ¬Ã…“Aà ¢Ã¢â€š ¬? in main equation which is (-0.208) and it is taken as beta of LnLoanAmount (loan amount) for production efficiency the value is (0.262). The equation derived from the results. Interpretation of results The final equation showed the total factor productivity of 0.8122 and alpha for production loan is 0.262 which is greater than 0. Tests of Between-Subjects Effects focusing on row 6 and row 7 which are significance or p value and Partial Eta Square in this case here again significant level at 5% has been taken. Looking at intercept which was total factor productivity in COBB-DOUGLAS model it seem to be significant F(1, 2847.736) p=0.000 (p0.05) and have Partial Eta Square of 0.179 or 17.9% so it means the total factor productivity is significant and is important for production efficiency improvement because it explains 17.9% variation in production output. Most important variable is Production loan amount which is significant F(1,1829.589) p=0.000 which is less than 0.05 so it is significant Partial Eta Square is 0.123 which 12.3% only which shows the medium variation but not as expected in production output so its means that either the policy of pro duction loans is not adequate or it is not much efficient from year 2005 and onwards state bank of Pakistan has work much on providing production in adequate manners and offered different types of schemes specially for small farmers to provide them credit for production easily to increase the production efficiency. Second is Crop Type which is significant F (30,934.741) p=0.000 and Partial Eta Square is 0.683 which 68.3% which shows high variation explained by Crop Type means that for production efficiency type of crop is considered very important may be some crops give high productivity in this case it is sunflower while the crops production for other crops than sunflower shows no growth or constant production in span of 1990-2007. Third is Loan Type which is also significant F (3, 92.942) p=0.000 and Partial Eta Square is 0.021 which 2.21% which is also show low explanation in dependent variable (production) but it is still significant partial eta square shows that type of l oan in this case is loan for pesticide, fertilizer, seed and others doesnà ¢Ã¢â€š ¬Ã¢â€ž ¢t have very much significant effect on production level. Fourth is year which is also significant F(16,30.61) p=0.000 and Partial Eta Square is 0.036 which 3.36% which shows low explanation in dependent variable (production) but it is still significant partial eta square(3.36%) and if the diagram showing marginal means of production is analyzed it shows that by the passage of time production drastically decreased from 1990-2007 the trend is going downwards slightly increased production is seen in 2005-2007 because of change in agriculture credit policy for improvement lack of agriculture credit and proper policy for farmers specially small farmers which are more in quantity may be the reasons for this trend in these three years state bank of Pakistan has done a lot on providing small farmers adequate credit for improvement of production efficiency. Hypothesis Assessment Summary H1: Th ere is an association between agriculture credit and development efficiency. The first hypothesis in this research was whether there is an association between agriculture credit and development efficiency on the basis of statistical test results in which significance value was used at 5% the hypothesis was accepted because the results for development loan were significant F(1,5.219) p=0.022 which is less than 0.05(5% level of significance) so it is significant the variability caused by development loan in yield output is 3% therefore it is concluded that development credit has association with development efficiency. H2: There is an association between agriculture credit and production efficiency. The second hypothesis in this research was whether there is an association between agriculture credit and production efficiency on the basis of statistical test results in which significance value was used at 5% the hypothesis was accepted because the results for development loan were significant F(1,1829.589) p=0.000 which is less than 0.05(5% level of significance) so it is significant the variability caused by production loan in production output is 12.3% therefore it is concluded that credit disbursed for the purpose of improving production efficiency had association between them. CONCLUSION AND RECOMMENDATIONS Research Implications This research has practical implications for predicting the productivity impact of agriculture credit in two areas to measure the overall productivity first is the development efficiency and second is production efficiency. The findings of the study concluded that credit disbursed for both production and development efficiency have significant impact but the impact is not as much strong as required also different factors are involved which type of crops are more productive in which province the credit requirements are more and which type of loan should be focused more the findings also suggested that crop type is con sidered very important while disbursing the credit specially for major crops also the type of loan is also very important for disbursing the credit. Implications for this research are that the requirements of the agriculture sector should be properly analyzed specially it is very important to understand to which type of loan either for production or development credit requirement is more than the others therefore proper amount of credit should be allotted for that purpose secondly according to the results loan for development efficiency is not up to proper requirement for the efficient improvement in land development like land leveling, irrigation and water courses the development loan should be disbursed according to requirements of agriculture sector it is very important that for better production of crops land development should be more efficient. The government should imply such strategies and programs to improve the credit supply system for better productivity in the sector alt hough the economy of Pakistan is highly depend on agriculture sector also strategies should be developed for the easy and secure credit supply which can result in proper utilization of agriculture credit and can results in better productivity. Conclusions The results for development loan on development efficiency concludes that there is a positive association between development loan and development efficiency but not up to that extent that is needed the reasons can be the credit policy is not accordingly as the need of credit for development efficiency or increase in yield per hectare also the types of loans government is providing for development efficiency is not significant to increase the yield output in such manners so the credit policies of providing loans should be re-analyzed accordingly. As for impact of credit on production efficiency the results are same like development efficiency there is a positive relationship between credit and production efficiency but not so significant enough the reasons can be amount disbursed in these years(year variable removed from the model due to that reason) 1990-2007 doesnà ¢Ã¢â€š ¬Ã¢â€ž ¢t vary too much according to needs and the policy for the development loans is not much efficient but it is still significant also loan type is not significant means that loans disbursed for different purposes like tractors, water logging, land leveling etc. doesnà ¢Ã¢â€š ¬Ã¢â€ž ¢t have much impact on yield output.