The Effect Of Capital Structure On Firm Performance: Evidence From Pharmaceutical Industry Of Pakistan

Abstract

The basic aim of the study is to find out the impact of capital structure measured by total debt ratio and long-term debt ratio on firm performance, which is represented by Return on Assets (ROA), with reference to the pharmaceutical sector of Pakistan. Every organization’s basic and ultimate goal is to maximize its profitability; therefore capital structure and its management are considered to be among the main factors that play a vital role in achieving the desired objective. Data were collected from 128 panel observations from eight companies by pooling 16 years of data from companies which were registered on the Pakistan Stock Exchange (PSX) and their audited financial reports were used for the study. In addition, descriptive statistics, including mean, median, minimum maximum values, standard deviation and variance, were analyzed. Multiple regression models were used to conduct the analysis. The results revealed that LTD has a significant positive effect on ROA, while TDR has an insignificant negative effect on ROA. To improve performance and maintain profitability, management is advised to maintain an appropriate level of long-term debt to enhance profitability.

Keywords:

capital structure, firm performance, return on assets, long term debt, firm size, total debt ratio and pharmaceutical.