Exploring the relationship of External Financial Forces, Capital Structure and Financial Performance : A Study of Pakistan Stock Exchange

Abstract

The purpose of this research is to determine the impact of external financial pressure, capital structure and financial performance in context of PSX. In the quantitative method, the study samples the PSX firms to assess hypothesized relationship between capital structure characteristics, financial performance indicators, and external financial factors including inflation and exchange rate risk. Thus, it is possible to conclude that increased leverage levels are associated with lower profitability and ROE, which reveals the dangers of excessive reliance on debt financing. Furthermore, the study shows that there is a positive relationship between inflation and leverage implying that firms may use debt as a way of managing for inflation. On the other hand, exchange rate volatility has a reverse effect on ROE, which explains the difficulties that accompany fluctuations in currency exchange rates. They also impacted the liquidity ratios like the current ratio showing that even when the market is unstable, an effective approach to managing liquidity is required. The last section of the study identifies the implications of the findings for the practice, the policy, and the research with recommendations toward the improvement of financial structure and the operation of the PSX. In summary, this study contributes to the financial literature by enhancing knowledge on financial risk in emerging markets and offers useful guidelines for organizations operating in the challenging Pakistani financial environment.