Impact of Debt Financing on Corporate Financial Performance (Evidence From Pakistan's Textile Firms)

Abstract

The decision of the debt financing is very important for the business firms in many aspects in a field of economy. It is mostly not easy for a business organization to analyze the correct composition of the debt and equity.The decision is crucial due to the fact of the requirement of maximizing recovery to several constituencies of the firm.This one is also crucial due to the impingement of decision on organizations capability of dealing with its combative environment. An organization can select among many other capital structures.The structure of capital used by the organization can be a reasoning affecting their trends of financial performance, a controversy that has not been provided sincere concentration by past investigators.The aspect of debt is that the one has borrowed the money must give back the borrowed money as per agreement and also look into the charges of the services e.g the loan fee and interest.Many organizations utilize both types of financing in the process of making the life of their business. Loan borrowing, bond issuance, selling of shares are the main things for supporting an organization with finance and borrowing of the loan. Finally, the financing of equity provides more leverages in order to run the organization’s management. Debt to equity combination of an organization may have necessary indications for the worth of an organization and capital’s cost. In increasing wealth of shareholders, an organization utilizes more capital of debt in the structure of capital as the interest given on it is a tax provable and decreasing the debt is cost effective. The regression result shows that DTE and SDTA influence negatively to ROA and ROE. Firm growth has statistically significant and positive effect on ROA and ROE. LDTA has positive but insignificant effect. Therefore, results recommend that debts are not favourable for the profitability of the textile firms and supported by pecking order theory. The results are consistent with the previous study Abor (2007) and Tian (2007).