37 Journal of Economics and Behavioral Studies (ISSN: 2220-6140) Vol. 7, No. 4, pp. 37-47, August 2015 An Interaction between Firm Strategy, Capital Structure and Firm’s Performance Suresh Ramakrishnan, Agha Amad Nabi, * Saqib Muneer, Melati Ahmad Anuar Faculty of Management, Universiti Teknologi Malaysia, Malaysia * saqibmuneer85@gmail.com Abstract: The study tries to determine the association among corporate strategy, social structure and firm performance. In this regard, the monetary reports of 78 companies listed in Karachi Stock Exchange since 2007 to 2014 were scrutinized. In this research, firm strategy (sales growth, liquidity) and capital structure (debt ratio) were used as sovereign variables, and firm performance (return on equity, return on assets, free cash flow for the firm, free cash flow per share) were functional and are used as dependent variables, so to study the affiliation between corporate strategy, capital structure and firm performance within a 8-years period from 2007 to 2014. Secondary data has been used to test the hypotheses; single variable linear regression method was used and their significance was evaluated using Statistics T (t-test) and F (Fisher). The study results indicate that there is a significant positive relationship between sales growth variables and two types (among four types) of performance criteria in the study, namely return on equity and return on assets. And there is a positive significant relationship between firm liquidity and three criteria of firm's performance in the study namely return on equity, free cash flow per share and return on assets. Also, debt ratio has a positive significant relationship with free cash flow for firm and a negative significant relationship with return on assets. Keywords: Capital Structure, Corporate Strategy, Liquidity, Firm Performance, Free Cash Flow for Firm 1. Introduction Firms to develop and grow require financial resources, and decision making regarding using different financial resources and determining a sufficient capital structure which maximize stockholders wealth is considered as a one of the most significant issues encountered by managers. Nowadays, credit rating of firms depends largely on its capital structure, and in fact the basis for the production and the delivery of service depend mainly upon supplying and using funds (Mires et al., 2001). Notably, the social structure of each firm is an initial precaution in connection with its financial problems, and in corporate strategic planning, it is necessary to determine the factors influencing the efficacy of their financing. Firms nowadays work in an increasingly developing and competitive environment. To survive, they are forced to deal with many national and international competing factors and to develop their activities through new investments. The significance of capital structure attracted more attention since the studies conducted by Modigliani and Miller (1958). They believed that there is no difference between financing through return on equity and debt considering firm value. Therefore, different methods of financing have no extra value for firm, and there is no limitation for manager. But experimental evidences showed that the above issue does not practically exist and Modigliani and Miller (1961) indicated new results, and the significance of firms' social capital was determined more than before (Onaolapo & Kajola, 2010). Key point for firm performance is firm strategy formula and executive decisions (Miller & Rock, 1985). The present study attempts to investigate the relationship between firm performance by using two variables, namely corporate strategy (sales growth strategy and liquidity) and social capital. 2. Literature Review Strategic thinking is considered an undeniable prerequisite to management in the third millennium. Increasingly changing and wonderful evolutions in all commercial and economic aspects indicate a taking privilege of a strategic thinking. To effectively formulate strategies, financial strengths and weaknesses of each firm must be determined. Liquidity, loan amount, flowing capital, profitability, efficient use of assets, cash flows and return on equity must be in a way that some strategies discarded. Regarding the effect of