The Effect of Capital Structure on Profitability of Non-Financial Sectors: Evidence from Pakistan Stock Exchange

Abstract

The purpose of this research is to look at the impact and effect of capital structure on the performance of organizations in Pakistan's nonfinancial sector. The sample size for the study is non-financial organizations listed on the Pakistan Stock Exchange. Capital structure has always been a major topic, whether in terms of determining it or its impact on firm profitability. Pakistan is a developing country and it is trying to become stable in its economic strength. Best way for Pakistan to go about it is to make its financial and non-financial sectors stronger so to increase employment opportunities, overall quality of products, and by more profit paying more tax hence increasing revenues for the government. At the same time imports from other countries would decrease and exports would increase. So this study is done to help the concerning parties on how to manage their capital structure the best way possible so as to increase their profitability to the maximum. To Measure the performance of the firms profitability, Return on Assets (ROA) and Return on Equity (ROE) are taken as profitability measures and Debt to Equity Ratio as Capital Structure variable. Stata 14.1 is used for our calculations. Total population of non-financial firms listed in Pakistan Stock Exchange is taken as 404 whereas the selected sample size is 78. Test used to measure our data is Hausman Test and random effect test. Results are found that size of capital structure impacts ROA in positive way and ROE in negative way. This means as Leverage increases ROA increases at the same time ROE decreases Recommendations are also given to the government on how to manage this Thesis for their maximum Advantage.