Impact of Debt on Profitability of Firms: Evidence from Non-Financial Sector of Pakistan

Abstract

This study focuses on expanding the existing empirical knowledge on the impact of debt on profitability of companies. Different sets of variables have been used to investigate the relationship between debt and profitability of firms with empirical evidence from the non-financial sector of Pakistan; using panel data of 10 years, ranging between 2003-2012. Return on assets is used as the profitability measure and is the dependent variable, whereas; Short term Debt to Asset, Long Term Debt to Asset, Total Debt to Asset are used as independent variables, while Size, Sales Growth, and Growth Opportunity are used as control variables. Random effect regression analysis is used to find out the impact of debt on profitability. Results indicate a significant but negative relationship between short term debt, long term debt, total debt, and return on assets.

Keywords: Capital structure, Debt, Profitability, optimal capital structure

JEL Classification: P34, D24, H53