Effect of Financial Leverage on Performance of the Firms: Empirical Evidence from Pakistan

Abstract

This research finds the effect of financial leverage on efficiency of firms in Pakistan. The ordinary least square technique is used to detect efficiency of financial leverage of 154 textile firms in Pakistan over the period 2006-2011.The regression results indicate that leverage has s negative association with the efficiency of firms. Financial leverage is negatively associated with return of assets and equity, which shows that firms borrow less, while market-to-book ratio shows positive profitable association with firms. Consequently firms tend to borrow more and pay their contractual payments in time.

JEL: E44, L1, M31, F38
Key words: Leverage, structure of capital, firm performance, theory of pecking order, theory of trade-off