Impact of Financial Leverage on Value of Firms: Evidence from Cement Sector of Pakistan

Abstract

The purpose of this paper is to investigate the effect of financial leverage on firm’s value in cement sector of Pakistan. By selecting the appropriate panel econometric technique between fixed effects and random effects, the association between financial leverage and firm’s value of all cement companies listed on the Karachi Stock Exchange during 2008-2012 has been analyzed. The total number of listed cement companies at KSE is 19. The empirical results depict that financial leverage has positive and statistically significant association with value of firm which is represented by Tobin’s Q. It is apparent from these findings that cement companies of Pakistan can increase their value by creating a suitable mix of equity and debt in their capital structure. Among the control variables, firm size is negatively and insignificantly related with Tobin’s Q. Asset tangibility has inverse and significant relationship with Tobin’s Q. The liquidity is found to have positive and significant association with value of the cement companies which show that efficient working capital management leads to increased firm value. The conclusions of this study have practical implications for financial managers of cement sector to include a suitable amount of debt in their capital structure.

Keywords: Pakistan, Financial leverage, Firm’s value, Cement sector