Financial Leverage and Firms’ Performance: Empirical Investigation of KSE-100 Index
Capital generation to fund everyday operations and long-term expansions is a constant concerning element in the corporate world. This study aims to investigate the optimal level of capital structure that firms can adopt to improve their financial performance given the industry dynamics and economic circumstances of the country. Using Hausman’s specification test, annual data for the period 2005 – 2014 of Karachi Stock Exchange (KSE) 100 index listed securities has been collected to analyze the impact of financial leverage on the firms’ performance. Return on assets, return on Equity, and TOBIN’s Q are the proxies of financial performance analyzed against financial leverage for the KSE 100 index listed firms. The finding of the paper indicates that capital structure, leverage, interest cover and sales growth as most significant variables impacting firms’ profitability.
Abor, J. (2005). The Effect of Capital Structure on Profitability: an Empirical Analysis of Listed Firms in Ghana. Journal of Risk Finance. Vol. 6(5): 438-445.
Abor, J. (2007). Debt Policy and Performance of SMEs: Evidence from Ghanaian and South Africa firms. Journal of Risk Finance. Vol. 8: 364-379.
Amidu, M. (2007). Determinants of Capital Structure of Banks in Ghana: an Empirical Approach. Baltic Journal of Management. Vol. 2(1): 67-79.
Baker, M., & Wurgler, J. (2002). Market Timing and Capital Structure. Journal of Finance. Vol. 57(1): 1-32.
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working Capital Management, Corporate Performance, and Financial Constraints. Journal of Business Research. Vol. 67(3): 332-338.
Berger, A. N., & Di Patti, E. B. (2006). Capital Structure and Firm Performance: A New Approach to Testing Agency Theory and an Application to The Banking Industry. Journal of Banking & Finance. Vol. 30(4): 1065-1102.
Boadi, E. K., & Li, Y. (2015). An Empirical Analysis of Leverage and Financial Performance of Listed Non-Financial Firms in Ghana. International Journal of Economics and Finance. Vol. 7(9): 120-130.
Bokhari, H. W., & Khan, M. A. (2013). The Impact of Capital Structure on Firm’s Performance (A case of Non-Financial Sector of Pakistan). European Journal of Business and Management. Vol. 31(5): 111-137.
Chechet, I. L., & Olayiwola, A. B. (2014). Capital Structure and Profitability of Nigerian Quoted Firms: The Agency Cost Theory Perspective. American International Journal of Social Science. Vol. 3(1): 139-158.
Chowdhury, A., & Chowdhury, S. P. (2010). Impact of Capital Structure on Firm’s Value: Evidence from Bangladesh. Business and Economic Horizons. Vol. 3(3): 111-122.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring Firm Performance using Financial Ratios: a Decision Tree Approach. Expert Systems with Applications. Vol. 40(10): 3970-3983.
El-Sayed Ebaid, I. (2009). The Impact of Capital-Structure Choice on Firm Performance: Empirical Evidence from Egypt. Journal of Risk Finance. Vol. 10(5): 477-487.
Fareed, Z., Aziz, S., & Naz, S. (2014). Testing the Relationship between Profitability and Capital Structure of Textile Industry of Pakistan. World Applied Sciences Journal. Vol. 29(5): 605-609.
Fosu, S. (2013). Capital Structure, Product Market Competition and Firm Performance: Evidence from South Africa. Quarterly Review of Economics and Finance. Vol. 53(2): 140-151.
Ge, W., & Kim, J. B. (2014). Real Earnings Management and The Cost of New Corporate Bonds. Journal of Business Research. Vol. 67(4): 641-647.
Graham, J. R. (2000). How Big are The Tax Benefits of Debt? Journal of Finance. Vol. 55(5): 1901-1941.
Hasan, M. B., Ahsan, A. M., Rahaman, M. A., & Alam, M. N. (2014). Influence of Capital Structure on Firm Performance: Evidence from Bangladesh. International Journal of Business and Management. Vol. 9(5): 184-192.
Jensen, M. C., & Meckling, W. H. (1976). Theory of The Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics. Vol. 3(4): 305-360.
Kajola, S. O., Adewumi, A. A., & Oworu, O. O. (2015). Dividend Pay-out Policy and Firm Financial Performance: Evidence from Nigerian Listed non-Financial Firms. International Journal of Economics, Commerce and Management. Vol. III (4): 1-12.
Margaritis, D., & Psillaki, M. (2010). Capital Structure, Equity Ownership and Firm Performance. Journal of Banking and Finance. Vol. 34(3): 621-632.
Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and The Theory of Investment. American Economic Review. Vol. 48(3): 261-297.
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and The Cost of Capital: a Correction. American Economic Review. Vol. 53(3): 433-443.
Mule, R. K., & Mudras, M. S. (2015). Financial Leverage and Performance of Listed Firms in a Frontier market: Panel evidence from Kenya. European Scientific Journal. Vol. 11(7): 534-550.
Muritala, T. A. (2012). An Empirical Analysis of Capital Structure on Firms’ Performance in Nigeria. International Journal of Advances in Management and Economics. Vol. 1(5): 116-124.
Myers, S. C., & Majluf, N. S. (1984). Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics. Vol. 13(2): 187-221.
Niresh, A., & Velnampy, T. (2014). Firm Size and Profitability: A Study of Listed Manufacturing Firms in Sri Lanka. International Journal of Business and Management. Vol. 9(4): 57-64. DOI: 105539/ijbm.v9n4p57.
Ogundipe, S. E., Idowu, A., & Ogundipe, L. O. (2012). Working Capital Management, Firms’ Performance and Market Valuation in Nigeria. World Academy of Science, Engineering and Technology. Vol. 61(1): 1196-1200.
Owolabi, S. A., & Inyang, U. E. (2013). International Pragmatic Review and Assessment of Capital Structure Determinants. Kuwait Chapter of Arabian Journal of Business and Management Review. Vol. 2(6): 82-95.
Pandya, B. (2016). Impact of Financial Leverage on Market Value Added: Empirical Evidence from India. Journal of Entrepreneurship, Business and Economics. Vol. 4(2): 40-58.
Phillips, P. A., & Sipahioglu, M. A. (2004). Performance Implications of Capital Structure: Evidence from Quoted UK Organisations with Hotel Interests. The Service Industries Journal. Vol. 24(5): 31-51.
Ross, S. A. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. The Bell Journal of Economics. Vol. 8 (1): 23-40.
San, O. T., & Heng, T. B. (2011). Capital Structure and Corporate Performance of Malaysian Construction Sector. International Journal of Humanities and Social Science. Vol. 1(2): 28-36.
Shubita, M. F., & Alsawalhah, J. M. (2012). The Relationship Between Capital Structure and Profitability. International Journal of Business and Social Science. Vol. 3(16): 104-112.
Strebulaev, I. A., & Yang, B. (2013). The Mystery of Zero-Leverage Firms. Journal of Financial Economics. Vol. 109(1): 1-23.
- There are currently no refbacks.