The Impact of Capital Structure on Firm’s Performance ( A case of Non-Financial Sector of Pakistan)

Abstract

This paper tends to investigate the impact of capital structure on the firm performance of the firms from the non-financial sector of Pakistan. Non-financial firms listed on Karachi Stock Exchange are taken as the sample size for the study. For measuring the performance of the firms Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM) and Earning per Share (EPS) are used as proxies. Short Term Debt (STD), Long Term Debt (LTD) and Leverage of the Firm or Total Debt (LEV) are variables for the capital structure. Controlled variables installed in the study are Size of the Firms (SIZE), Sales Growth (SALG), Assets Growth (ASSG) and Assets Turnover or Efficiency of the Firm (ASST). The total firms were 441, due to incomplete data it came down to 380 firms. Ordinary Least Square (OLS) method is used to analyze the performance, data is taken from 2005 to 2011 i.e. 7 years. Short Term Debt (STD), Long Term Debt (LTD) and Leverage of the Firm (LEV) have a negatively affected Return on Assets (ROA). Return on Equity (ROE) has a negative relation with all the capital structure variables but with Long Term Debt (LTD) and Leverage of the Firm (LEV) it was insignificant. In case of Net Profit Margin (NPM) the impact was positive but was insignificant for all the variables i.e. Long Term Debt (LTD), Short Term Debt (STD) and Leverage of the Firm (LEV). All the capital structure variables negatively affected Earning per Share (EPS) and were significant. Assets Turnover affected the performance positively for all proxies except Net Profit Margin (NPM) for which it was positive but insignificant. Size of the firm positively affected the performance overall while Sales Growth (SALG) has a significantly negative impact on Return on Assets. Assets Growth was found to have on impact on the performance of the firms.

Keywords: Capital Structure, Firm’s Performance