“Impact of Capital Structure on firm’s performance: Evidence from Banking Industry of Pakistan

Abstract

Purpose: The purpose behind this research is to analyze the relationship between the capital structure and firms’ performance of banking industry of Pakistan. Design/methodology/approach: Three panel data estimation techniques are used to analyze the relationship between the capital structure and firms’ performance. These techniques included descriptive statistics, correlation matrix, and regression analysis. Findings: The regression analysis results have shown that all measures` of capital structure have a negative effect on return on asset and Spread ratio, while positive effect on return on equity. In addition to the above findings, the results have also indicated that the control variable, i.e. size of firm, is positively related to the banks’ performance. Practical Implications: The statistical results have suggested that in banking industry of Pakistan, using higher debt than the equity, has positive and negative effect on profitability due to use of different debt. Consequently, the financial managers must anticipate the effects of financial leverage in term of short and long both on the banks’ performance before making any regulations regarding the capital structure decisions.