Impact of Capital Structure and Corporate Governance on Profitability of Firms in the Textile Sector of Pakistan

Abstract

Objective of the Study: This research paper aims to examine the impact of Capital Structure by using key variables such as Debt-to-Equity, Short-Term-Debt, Long-term-Debt and Total Debt Ratio and Corporate Governance practices by using widely used determinants such as Board Size, Board Independence, Board Diversity and Board Committees on a firm’s financial performance and stability. This study highlights significant gaps in the existing literature within the Pakistani context and serves as a foundation for further research in the fields of capital structure and corporate governance. Design/methodology/approach: The research comprises 34 textile manufacturing companies listed in the Pakistan Stock Exchange from the period of 2017 to 2024. Using the panel data, this study employs an ordinary least square model to obtain the relation amongst the regressor variables (CS and CG) with the explained variable (FP). Different equation models are constructed to observe the separate impact of each proxy of the explanatory variable. A multivariate estimation is also used to study the overall effect of the determinants. Empirical Results: This study’s evidence indicates that the increased leverage consistently undermines firm profitability, whereas corporate governance attributes for instance, a larger board size, board independence, more board committees, and board diversity generally enhance firm’s performance. Practical Implications: Policymakers and industry professionals can use the findings to balance their capital structures and adopt robust corporate governance practices for improved firm’s profitability and resilience.