Abstract
The purpose of this study was to measure the impact of financial leverage on the performance of 424 Pakistani nonfinancial listed companies over the 2001–2017 period. Three measures of financial leverage, i.e., short-term debt (STDL), long-term debt (LTDL), and total debt (TLEVR), were applied to examine their impact on performance, i.e., sustainable growth (SGR), Tobin’s Q, return on assets (ROA), return on equity (ROE), and return on sales (ROS). Robust results obtained using the generalized method of moments (GMM) report a significant negative impact of financial leverage on performance. The results also confirm an inverted U-shaped relationship between financial leverage and performance, indicating that an increase in the financial leverage of Pakistani listed companies increases their performance up to a certain level, and after that, a further increase in financial leverage decreases their performance. The results further suggest that STDL is a main contributing source of debt that causes a higher risk of refinancing for companies and thus negatively affects performance. This study’s findings are useful for academics, management, policymakers, and regulators to understand the importance of financial leverage and to choose between STDL and LTDL to fund financial needs.
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Acknowledgements
The authors would like to thank the anonymous referees very much for their valuable comments and suggestions. This work would not have been possible without their support. We are also thankful to the editorial board for considering our work for the publication. This work was supported by the National Natural Science Foundation of China No. 71973054.
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Akhtar, M., Yusheng, K., Haris, M. et al. Impact of financial leverage on sustainable growth, market performance, and profitability. Econ Change Restruct 55, 737–774 (2022). https://doi.org/10.1007/s10644-021-09321-z
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DOI: https://doi.org/10.1007/s10644-021-09321-z