Impact of Financial Leverage on Pakistani Firms

Abstract

The purpose of the study is to find the factors that influence on financial leverage of Pakistani firms. The dependent variable is financial leverage and independent variables are profitability, size and growth of the firms. A sample of 10 Firms is selected from two (02) sectors (Cement Sector and Service sector). This study used the secondary data from annual reports of companies from 2006 to 2012. The regression of model and correlation is used to check the factors that influence on the financial leverage. The results of correlation showed that in manufacturing sector Financial leverage (FL) has a negative relationship with profitability (ROA), while Size of the firm (FS) and growth of the firm (FG) have no impact on financial leverage. It means that as financial leverage increases profitability decreases. In Services sector financial leverage (FL) has a positive relation with Size of the firm (FS) while profitability (ROA) and growth of the firm (FG) have no impact on financial leverage (FL). The regression analysis results showed that model is fit for the research and can predict future results. It means that as size increases financial leverage also increases. This finding may be useful for financial advisor, investor and financial managers.

Keywords: Pakistani firms, Financial leverage, profitability, Size, Growth