IMPACT OF DEBT FINANCING ON FIRM PERFORMANCE: A CASE OF BUSINESS SECTOR OF PAKISTAN
it is essentially important to remove the ambiguity as to which measure of financing in a company’s capital structure proves as more favorable in improving its performance, or contrarily if there is no relevance of capital structure choice on the company’s value creation. For conducting this study, a leverage ratio of Debt-to-Equity and performance measurements of Return-on-Assets, Return-on-Equity and Tobin’s-Q ratio have been used as independent and dependent variables respectively to check for the impact of debt financing level on a firm’s performance outcomes. Firm age and size have been controlled for, in order to improve the reliability of the results. The sample comprises of 50 business firms of Pakistan, listed on the stock exchange, divided into the sectors of service and manufacturing, and the data has been collected for six years, from 2013 to 2018. Fixed Effects Regression analysis is used for the balanced panel data, which yields that debt financing has a significantly positive impact on firm performance for manufacturing sector companies, while for the service sector, this impact is insignificant. Because of the manufacturing sector, the whole business industry achieves high results on the performance indicators, and since the debt-to-equity ratio is a notable contributor to this achievement, debt financing is found to be beneficial for company’s operating activities. Therefore, this paper holds major implications for corporate boards to combine feasible proportions of debt and equity when making financing decisions, and for shareholders and creditors to choose whether to make investments in a potential firm.
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