IMPACT OF DEBT FINANCING ON FINANCIAL PERFORMANCE OF FIRMS: A Systematic Literature Review

Abstract

Debt financing is a major aspect of capital structure which represents the borrowed portion of funds hoisted through external funding. Debt plays a noteworthy role in persuading the fiscal performance of any organization because it creates a continuous pressure of making interest payment along with principal amount. Present study aims to discover the efficacy of debt financing on financial performance of the organization and it’s purely depends upon the findings of previous related literatures. For this purpose, Web of Science and SCOPUS database has been taken as base to collect the required information while it includes documents of all time spans available, from 1985 to 2022, in database. After gathering the data, a systematic literature review has been performed and encountered that debt indicators have a significant negative impact on indicators of financial performance. Long-term debt, total debt, debt-equity ratio has significant but negative impact on firm performance which support the upshots of ‘pecking-order’ theory. Short-term debt has mixed effect on performance indicators. Control variables have also been evaluated like age, size, tangibility, liquidity, corporate tax, growth opportunities etc. and discovered that size, growth and liquidity portray a positive impression while age and tangibility have negative efficacy on monetary performance of the concern. Also, the study can be used as a ground to identify the literature gap of the concept and can be used in future for further research.