Effect of Debt Financing on Firm Performance: A Comparative Analysis of Financial and Non-Financial Firms

Abstract

This study is focused towards investigation of relationship prevailing impact of debt financing on firm performance, a comparative analysis between financial and non-financial firms. To investigate this relationship evidence has been collected from Pakistan stock exchange. The study formulated two groups in order to collect data from Pakistan stock exchange. For this purpose, sample of 35 Financial Companies and 35 non-financial companies were included in the study. The study collected data for each company from 2010 to 2020 on annual basis. The variables used for study are Debt to Equity Ratio, Long-Term Debt and Short-Term Debt, Return on Assets, Return on Equity, and Earnings per Share. Haussmann test is applied to select appropriate model from random model or fixed model to investigate the formulated objectives and hypothesis. Analysis of return on asset, return on equity and earning per share has been used as measure of firm performance. The results of fixed effect model for financial Companies suggest that Long-Term Debt and Short-Term Debt are significantly influencing ROE also short-term debt is significantly influencing EPS, according to Results of fixed effect model all other characteristic are not responsible for significantly influencing ROA, ROE and EPS of Financial firms. The results of fixed effect model related to non-financial companies suggest that Debt to equity is not responsible for significantly influencing ROA and EPS. The finding shows that all other characteristic is responsible for significantly influencing ROA, ROE and EPS. Debt financing has a negative but considerable influence on company performance in Pakistan, according to the findings of the study. The conclusions of this study suggest that enterprises should rely more on their internal sources of funding because it is the most cost-effective and trustworthy source of finance in Pakistan. For example, the predicted coefficients on certain financial factors are considerably negative, whereas several non-financial ones are highly positive. The comparative results show that their non-financial firms perform better as compare to financial firms. For example, the predicted coefficients on certain financial factors are considerably negative, whereas several non-financial ones are highly positive