Abstract
PurposeThe purpose of this study is to investigate the relationship between the listed firms' debt level and performance on the Pakistan Stock Exchange (PSX) during a five-year period.Design/methodology/approachThis study uses pooled ordinary least squares regression and fixed- and random-effects models to analyse a cross-sectional sample of 30 Pakistani companies operating in the automobile, cement and sugar sectors during 2013–2017 (N = 150).FindingsThe results indicate that both short- and long-term debt have negative and significant impacts on firm performance in profitability. This suggests that agency issues may lead to a high-debt policy, resulting in lower performance. However, both sales growth and firm size have positive effects on the profitability of non-financial sector companies.Research limitations/implicationsThis study suggests that when debt financing significantly and negatively influences firm profitability, company owners and managers should focus on finding a satisfactory debt level. However, this study is limited to the automobile, cement and sugar sectors of Pakistan. Future studies could address other sectors, such as textiles, fertilizers and pharmaceuticals.Originality/valueThis study focusses on enhancing the existing empirical knowledge of debt financing's influence on the PSX's major sectors' profitability.
Highlights
Any firm’s capital structure is the essence of maximizing wealth and minimizing the cost of capital (Sheikh and Qureshi, 2017)
The findings indicate that both long- and short-term debt have negative and significant effects on firm performance
This suggests that agency issues may lead to a high-debt policy, resulting in lower performance, contrary to the agency-cost theory (Jensen and Meckling, 1976), suggesting that a high debt level can increase market value and performance
Summary
Any firm’s capital structure is the essence of maximizing wealth and minimizing the cost of capital (Sheikh and Qureshi, 2017). Manufacturing firms usually opt for debt financing, which has consequences related explicitly to the firm’s profitability. It is the most crucial decision for the management because, in any corporate firm, it is the management’s job to make capitalstructure decisions that ensure a balanced proportion of both equity and debt. Capital structure is one of the primary corporate financing decisions because it has a vast influence on company financial performance. These facts encourage and motivate the research to explore the capital-structure decision’s insights and its effects on profitability
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
