Impact of Capital Structure on Banks Performance: Empirical Evidence from Pakistan

Abstract

Purpose: The study is attempted to test the significance of the impact of capital structure on financial performance of banks listed on Karachi Stock Exchange.Methodology: Study is explanatory in nature and deductive approach was adopted. The study incorporated financial performance variables as dependent and capital structure (financial structure) as independent. The dependent variables are spread ratio, return on assets and earnings per share and independent variables are total debt to total equity, long-term debt to total equity and short-term debt to total equity. Furthermore, the study incorporated data for five years from 2009 to 2013.Findings: The capital structure is negatively related with banks performance in Pakistan. All null hypotheses could not be accepted at level of significance 0.01 therefore all estimators are significantly related with performance.Practical Implications: The study specially explained that in the researches of capital structure the financial and non-financial sector cannot be combined because the relationships are opposite. Furthermore, the investors can use this work during the investment analysis.Originality / Value: It is assumed that the variables for financial performance were used first time in this type of study in Pakistan.

Keywords: Capital Structure, Earnings per Share, Return on Assets, Spread Ratio.

JEL Classifications: G32