Capital structure, competitive intensity and firm performance: evidence from Pakistan

Abstract

PurposeThe purpose of this paper is to explore the moderating role of competitive intensity between the existing relationship of capital structure and firm performance.Design/methodology/approachUsing the balanced panel data of listed non-financial firms of Pakistan, the present study adopts both the panel and OLS estimation techniques to draw the inferences.FindingsThe results exhibit that high debt ratio is harmful for the accounting performance of the selected sample firms of Pakistan. In addition, product market competition negatively moderates the relationship between capital structure and firm performance which suggests that high product market competition can be used as a substitute of debt financing to align the interests of a firm’s managers and shareholders.Practical implicationsThe findings of the research provide evidence for the policy makers/regulators that the sample firms should discourage the high debt financing in the presence of competitive intensity in the product marketplace.Originality/valueThe core contribution of the current research is to examine the moderating role of product market competition on the leverage–performance relationship because, to the best of the authors’ knowledge, no single study has previously explored this relationship in the context of Pakistan.