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http://dx.doi.org/10.13106/jafeb.2022.vol9.no2.0081

The Relationship Between Capital Structure and Firm Performance: New Evidence from Pakistan  

ISLAM, Zia ul (Department of Management Sciences, Capital University of Science and Technology)
IQBAL, Muhammad Mazhar (Department of Management Sciences, Capital University of Science and Technology)
Publication Information
The Journal of Asian Finance, Economics and Business / v.9, no.2, 2022 , pp. 81-92 More about this Journal
Abstract
The necessity for a theoretical explanation of the negative association between capital structure and company performance is identified in this study. By focusing on accounting metrics of business performance, this study is the first to investigate the moderating effects of firm size between these variables using logical reasoning. Due to the possibility of endogeneity, this study applies a two-step system GMM approach with data from 285 non-financial enterprises from PSX over a 21-year period. For robustness, we employed pooled OLS, fixed effect, and two-step difference GMM. Our data show that leverage has a detrimental impact on business performance, with size acting as a moderator in the same direction. Our analysis empirically supports some studies while refuting others due to inconsistent results in the literature, but no study has theoretically justified their negative link. We believe that because larger companies have more and easier access to capital markets, they focus primarily on the amount of return, even if the investment is inefficient in terms of the rate of return, but small businesses do not. As a result of this thinking, firm managers' performance suffers as a result of leverage.
Keywords
Firm Performance; Capital Structure; Firm Size; GMM Model;
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Times Cited By KSCI : 3  (Citation Analysis)
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