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Impact of financial leverage on sustainable growth, market performance, and profitability

Muhammad Akhtar (), Kong Yusheng, Muhammad Haris, Qurat Ul Ain and Hafiz Mustansar Javaid
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Muhammad Akhtar: Jiangsu University
Kong Yusheng: Jiangsu University
Muhammad Haris: Jiangsu University
Qurat Ul Ain: Xi’an Jiaotong University
Hafiz Mustansar Javaid: Sapienza Università Di Roma

Economic Change and Restructuring, 2022, vol. 55, issue 2, No 8, 737-774

Abstract: 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.

Keywords: Financial leverage; SGR; Tobin’s Q; ROA; ROE; ROS; GMM; Pakistan (search for similar items in EconPapers)
JEL-codes: C23 G32 G33 L25 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10644-021-09321-z

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