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

City University Research Journal, Volume 06, Number 01, January 2016

11 Pages Posted: 14 Jan 2016

See all articles by Hassan Habib

Hassan Habib

The Bank of Khyber

Faisal Khan

University of Peshawar

Muhammad Wazir

Institute of Management Sciences - Peshawar

Date Written: January 01, 2016

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

Suggested Citation

Habib, Hassan and Khan, Faisal and Wazir, Muhammad, Impact of Debt on Profitability of Firms: Evidence from Non-Financial Sector of Pakistan (January 01, 2016). City University Research Journal, Volume 06, Number 01, January 2016. Available at SSRN: https://ssrn.com/abstract=2714461

Hassan Habib (Contact Author)

The Bank of Khyber ( email )

24 - The Mall
Peshawar Cantt, Khyber Pakhtunkhwa 25000
Pakistan

Faisal Khan

University of Peshawar ( email )

Quaid-E-Azam College of Commerce
Peshawar, PA Khyber Pukhtoon Khwa 25125
Pakistan

Muhammad Wazir

Institute of Management Sciences - Peshawar

Sector E-5, Hayatabad, Phase VII
Hayatabad
Peshawar, KPK 25000
Pakistan

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