Impact of Financial Sustainability on Firm Value with Mediating Effect of Leverage: Evidence from Distress and Non-Distress Pakistani Non-Financial Firms

Abstract

This study presents the effect of financial sustainability such as profitability and liquidity (qualitative measures) on firm value with mediating effect of leverage. The basic objective of the study is to acquire empirical evidence from the effect of financial sustainability (profitability and liquidity) on firm value with leverage. The study is based on distress and non-distress non-financial firms of Pakistan listed in the Pakistan Stock Exchange (PSX) from the period 2010 to 2019. A total of 221 firms are included in the study where 184 are distress and 37 are non-distress non-financial firms of Pakistan. The data of the study is analyzed through descriptive statistics, correlation analysis, and regression analysis. Stata software is used to analyze data and tests. The result of the study shows that profitability and liquidity have a positive and significant effect on distress and non-distress firm's value. Moreover, liquidity and leverage have a negative and significant effect on distress and non-distress firm's value. Whereas, profitability with leverage has a negative and significant effect on distress and a negative and insignificant effect on a non-distress firm's value. Furthermore, there are two control variables as firm size and firm age. The result shows that leverage mediates between financial sustainability (profitability and liquidity) and firm value.