The purpose of this study to measure the impact of capital structure (leverage) on the financial performance of listed companies in the sector of Textile, Automobiles, Sugar, Petroleum and engineering industry of Pakistan. The data was collected for the period of four years from 2012-2015. The data was extracted from the 21 firms for study. The Ordinary least squares models and Correlation are used for analysis the proxies. The results display that leverage measured by Debt to Assets has a statistically significant negative effect on firms’ financial performance measured by Return on Assets at 99.9% confidence interval. Keywords: Financial leverage, Capital Structure, Firms’ performance. 

Nazir, Muhammad Umair

English

The purpose of this study to measure the impact of capital structure (leverage) on the financial performance of listed companies in the sector of Textile, Automobiles, Sugar, Petroleum and engineering industry of Pakistan. The data was collected for the period of four years from 2012-2015. The data were extracted from the 21 firms for study. The Ordinary least squares models and Correlation are used for analysis the proxies. The results display that leverage measured by Debt to Assets has a statistically significant negative effect on firms’ financial performance measured by Return on Assets at 99.9% confidence interval.
Keywords: Financial leverage, Capital Structure, Firms’ performance

Nazir, Umair

International Institute for Science, Technology and Education (IISTE): E-Journals

European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.25, 2017  62 Impact of Capital Structure on Firm’s Financial Performance: Textile, Automobiles, Sugar, Petroleum & Engineering Industry of Pakistan  Umair Nazir MPhil Scholar at University of Lahore  Abstract The purpose of this study to measure the impact of capital structure (leverage) on the financial performance of listed companies in the sector of Textile, Automobiles, Sugar, Petroleum and engineering industry of Pakistan. The data was collected for the period of four years from 2012-2015. The data were extracted from the 21 firms for study. The Ordinary least squares models and Correlation are used for analysis the proxies. The results display that leverage measured by Debt to Assets has a statistically significant negative effect on firms’ financial performance measured by Return on Assets at 99.9% confidence interval. Keywords: Financial leverage, Capital Structure, Firms’ performance.  1. Introduction 1.1 Background of the Study Financing decision is very important for the companies and financing is made by the mixture of debt and equity. The mixture of financing is called the capital structure. The debt is the amount, obligations payable to the creditors with in specified period. The Indian Research shows the inverse relationship between the leverage and the company performance, due to the lending institutions are strictly governed by Indian Government (Majumdar, 1997). Jensen & Meckling (1976) had written in their study that conflicts and problems are created between the shareholders and debt providers due to the financial performance. It may lead to smashes due to variety of investment either debt or mix of both (Myers, 1977). Majumdar & Chhibber (1999) had shown an inverse relation between corporate debt and company financial performance. This is due to the high pressure of the agency cost. The similar results were shown by the study of Mahakud & Misra (2009). It was found that during industry recessions when highly geared companies fail to respond the market share to their rivals which were lower geared.   1.2 Research Objective The main objective of this study is to find importance of capital structure and its impact on the performance of Textile, Automobiles, Sugar, Petroleum and engineering sectors. This study will helpful for the company’s directors and managers while making financing decisions.    1.3 Research Question Is there effect of capital structure on financial performance of Pakistan Textile, Automobiles, Sugar, Petroleum and engineering sectors?   2. Literature Review The current literature emphasis the capital structure factors. In developing countries the factors of capital structure depends on the similar variables as are of firms in developed countries. Booth et al. (2001). He accompanied study on ten developing countries.  Singh (2010) had shown the results of his study that capital structure decision depends on the firm’s own characteristics and country’s macroeconomics.  The firm’s capital structure’s means debt, equity or a combination of both and this optimal of structure matters the most. Modigliani & Miller (1958) study had given the basic research on the topic of capital structure. In consistent the firm’s value depends upon the real assets instead of it’s depends on the capital structure. The similar study conducted by (Stilglitz, 1972; Hatfield et al., 1994). The performance is a considerable point of the companies with respect to the company capital structure (Akintoye, 2008). Jensen (1986) had shown the results that which company has more leverage it can increase the financial performance, due to the companies managers are unable to initiate the negative NPV projects.  The pecking order theory with some development brings to the end that absence of information is a major factor. (Fama & French, 2005). Another research conducted by Bharath, Pasquariello & Wu (2006) to conclude that information about the firm level is essential for the sectional analysis but it is not sole factor for the firm capital structure.  Eriotis, Franguoli, and Neokosmides (2002) had shown a negative relation between debt and profitability of European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.25, 2017  63 the companies.  The data had collected from the different sectors of the companies. The study was conducted in Hong Kong’s property sector showed a similar negative relation Chiang, Chang & Hui, 2002). Furthermore a study was conducted in Ghana for examine the relationship between the capital structure and listed companies performance. It had showed that debt to asset and current liabilities to total assets positive effect return on equity while long-term liabilities negatively effects on it (Abor, 2005). Another study had taken in the region of Africa by Kyereboah & Coleman (2007) on micro finance banks; the study examines the effect of capital structure on return on equity and return on assets derived to the conclusion about negative relation between leverage and performance. Leverage is negatively related with the performance, PE ratio depicts an insignificant effect (Zeitun & Tian, 2007). Similar conclusion was shown by the study of DeAngelo & Masulis (1980). It is showing best capital structure tradeoff model. Moreover, there was no relation between debt to asset ratio and non-debt tax shield. The change in the leverage due to the change in the capital structure will lead to increase in the share price. This study shared for the capital structure model by (Harris & Raviv, 1991). The capital structure and dividend policy are used as indication devices. Top-level management can go for making decision of financial policy through the widely available market information, if the market does not give the response of efficiency. The reaction leads to financial distress and capital structure this connection was studies by the Ofek (1993). There are two types of costs that effect to the firm bankruptcy one is that direct and second is that indirect cost. Very few studies have been conducted in developing countries such as Pakistan in which no study done in aforesaid five sectors specifically Textile, Automobiles, Sugar, Petroleum and engineering.  The literature tells us about the different results on the relationship between financial performance and capital structure. Pakistan capital market had optimal level of asymmetric information then other developed countries markets. So in this study we are going to examine the impact of capital structure on the Pakistan firm’s financial Performance listed in Automobiles, Textile and Engineering sector.    3. Methodology 3.1 Research Approach In this study we use the quantitative technique for examine the relationship between the company’s capital structure and the financial performance.   3.2 Research Sample Total twenty one listed firms has been selected for the conducting this research, from Pakistan stock exchange, Pakistan. The data for the remaining one company was incomplete and have been filtered out. Sample consists of 82 observations for period of 4 years i.e. 2012 and 2015. The firms were selected on the basis of availability of the data for the above given years.  3.3 Data Secondary data has been used for this study. Sources of data include:  Annual financial statements  Official announcements from Company’s websites  Pakistan stock exchange and Securities and Exchange Commission website.  3.4. Statistical Technique Correlation has been applied for the relationship between the returns and leverage, moreover regression is to find out the impact of leverage on firm’s return using SPSS.  3.5 Research Model We have used the following regression model for measure the relationship:         ∈++= Leverage*βαAOR   3.6 Hypothesis Ho: There is no relationship between leverage and firm’s financial performance.   3.7 Symbol of Financial performance and its description: Symbol                                Variable                                  Definition                                        ROA                                      Return on Assets=               Profit after Tax/Total Assets   European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.25, 2017  64 3.8 Symbol Variable Definition Symbol                                Variable                            Definition                                        D/A                                   Debt to Assets =                 Total  Debts/ Total Assets In consistent with literature review these variables had used by Majumdar & Chhiber (1999) and Ahmad, Salman & Shamsi (2015) in their research.  4. Data Analysis 4.1 Descriptive Analysis The following table depicts the results of descriptive statistics summary for the dependent and independent variable. Descriptive Statistics  Mean Std. Deviation N ROA .0767 .19395 82 DEBTOASSET .5491 .63072 82 The descriptive statics table depicts the mean of ROA is .0767 and standard deviation is .19395. The mean value of Debt to Asset is .5491 and standard Deviation value is .19395.   Correlations  ROA DEBTTOASSET Pearson Correlation ROA 1.000 -.507 DEBTOAS -.507 1.000 Sig. (1-tailed) ROA . .000 DEBTOAS .000 . N ROA 82 82 DEBTOAS 82 82 The correlation table shows the negative correlation with value -.507 between leverage and the financial performance of the firms which is the significant at the level of 1%. To conclude the results of correlation means increase in leverage will results decrease in financial performance.   4.2 Inferential Analysis Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .507a .257 .247 .16825 a. Predictors: (Constant), DEBTOASSET The above table shows the extent of variability in the dependent variable which has explained by the independent variable.  The value of R2 displays at 0.257 which expresses that around 25.7% of variability of financial performance is described by leverage. Adjusted R2 is around to R2 which means there is no sample error.  ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .782 1 .782 27.639 .000b Residual 2.265 80 .028   Total 3.047 81    a. Dependent Variable: ROA b. Predictors: (Constant), DEBTOASSET The overall validity of the model is depicted by ANOVA statistics. The F-stat value is 27.936 which is higher than 4-cuttoff for F-stats. Moreover significant value shows significance of model and explanatory power of the model at 1% level.    European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.25, 2017  65  Coefficientsa Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) .009 .025  .360 .000 DEBTOASSET -.156 .030 -.507 -5.257 .000 a. Dependent Variable: ROA The table of coefficients shows the slope of the function, sign of the slop displays direction of the relationship and magnitude shows intensity of the relationship. The results tell us that if 1% increases in the Leverage it will decrease the return of firm 15.6%. T-stat is 5.257 which is greater than 2-cutt off for t-stat. As the coefficients table shows the associated significance value lesser than 1%, so the model is significant at 1%.   5. Conclusion, Limitation, and Recommendations 5.1 Conclusion The main objective of this study is to analyze the effect of capital structure on profitability of the companies listed in the Textile, Automobiles, Sugar, Petroleum & Engineering sectors of Pakistan Stock Exchange. The above given results have provided the evidence that there is a negative relationship between the financial performance and leverage. Our study indicates that if the leverage increases , the profitability decreases. Parallel outcomes were determined by research done by Eunju and Soo Cheong (2005), Ahmad, Salman & Shamsi (2015). Though a study showed in Ghana indicated a different results due to selection of sample of only top twenty firms due to the lower cost of debt in that countries while high cost of debt in Pakistan. The results display a negative correlation between the Debt to Asset and Return on Asset. Also the research results value of R2 shows that the variability explained is 19.50%, remaining is unexplained.  5.2 Limitation & Recommendations  The data for our research was extracted from 2012 to 2015. The complete data for the particular period was only available for 20 firms. So this study can be extended through the availibity of complete data and the time period can be increased. So in this direction the sample will produce more accurate results. This is recognized these sectors have more trading in the stock exchange and have high leverage in our country Pakistan.   6. References  Abor, J. (2007). Debt Policy and Performance of SMEs: Evidence from Ghanian and South African Firms.  The Journal of Risk Finance, 8(4), 364-379. Adelegan, O. (2002).The Pecking Order Hypothesis and Corporate Dividend Payout: Nigerian Evidence. African Review of Money Finance and Banking, 75-94. Ahmad, N., Salman, A., & Shamsi, A.F. (2015). Impact of Financial Leverage on Firms’ Profitability: An Investigation from Cement Sector of Pakistan. Research Journal of Finance and Accounting, 6(7), 75-80. Baker, S. H. (1973). Risk, Leverage and Profitability: An Industry Analysis. The Review of Economics and Statistics, 55(4), 503-507. Baltagi, B.H. (2008).Econometric Analysis of Panel Data, New York: John Wiley & Sons. Baxter, N. D. (1967).Leverage, Risk of Ruin and the Cost of Capital. Journal of Finance, 22(3), 395-403. Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing Countries. Journal of Finance, 56(1), 87-130. Cheng, M. (2009). Relative Effects of Debt and Equity on Corporate Operating Performance: A Quantile Regression Study. International Journal of Management, 26(1), 142-145. Dierkens, N. (1991). Information Asymmetry and Equity Issues. Journal of Financial and Quantitative Analysis, 26(2), 181-200. Fama, E.F., & French, K.R. (1998). Taxes, Financing Decisions, and Firm Value. Journal of Finance, 53(3), 819-843. Guha Khasnobis, B. & Bhaduri, S. (2002). Determinants of capital structure in India: A Dynamic Panel data approach, Journal of Economic Integration.17, 764-776. Mahakud, J., & Misra, A.K. (2009). Effect of Leverage and Adjustment Costs on Corporate Performance: Evidence from Indian Companies. Journal of Management Research, 9(1), 35-42. Majumdar, S.K. (1997). Debt, Where is Thy Sting? Leverage and Corporate Performance. Economic and Political Weekly, India, 32(8), 21-24. Majumdar, S.K., & Chhibber, P. (1999). Capital Structure and Performance: Evidence from A Transition European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.25, 2017  66 Economy on an Aspect of Corporate Governance. Public Choice, 98, 287-305. Majumdar, S.K., & Sen, K. (2010).Corporate Borrowing and Profitability in India. Managerial And Decision Economics, 31, 33-45. Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 32(2), 261-275. Myers, S. C. (1977).Determinants of Corporate Borrowing .Journal of Financial Economics, 5(2), 147-175. Myers, S. C., & Majluf, N.S. (1984). Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 13(2), 187-221. Myers, S.C. (1984).The Capital Structure Puzzle .Journal of Finance, 39(3), 575-592. Noe T.H. (1988). Capital Structure and Signaling Game Equilibria. Review of Financial Studies, 1, 331-355. Opler, T.C., & Titman, S. (1994).Financial Distress and Corporate Performance. Journal of Finance, 49(3), 1015-1040. Penrose, E.T. (1959).The Theory of the Growth of the Firm. Oxford: Basil Blackwell. Ross, S.A. (1977). The Determination of Financial Structure: The Incentive Signaling Approach. Bell Journal of Economics, 8(1), 23-40. Shah, A., & Hijazi, T. (2004).The Determinants of Capital Structure of Stock-Exchange-Listed Non-Financial Firms in Pakistan. The Pakistan Development Review, 43(4), 605-618. Shah, A., & Khan, S. (2007).Determinants of Capital Structure: Evidence from Pakistani Panel Data. International Review of Business Research Papers, 3(4), 265-282. Shah, S.M.A. (2007). Corporate Debt Policy-Pre- and Post-Financial Market Reforms: The Case of Textile Industry of Pakistan. The Pakistan Development Review, 46(4), 465-468. Singh, G. (2010). A Review of Optimal Capital Structure Determinant of Selected ASEAN Countries. International Research Journal of Business and Economics, 47, 32-43. Taub A. J. (1975).Determinants of the Firm’s Capital Structure. The Review of Economics and Statistics,410-16  Yoon, E. & Jang, S.C. (2005). The Effect of Financial Leverage on Profitability and Risk of Restaurant Firms. The Journal of Hospitality Financial Managements, 13, 200-210. 

Impact of Capital Structure on Firm’s Financial Performance: Textile, Automobiles, Sugar, Petroleum & Engineering Industry of Pakistan

European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.26, 2017  18 Impact of Capital Structure on Firm’s Financial Performance: Textile, Automobiles, Sugar, Petroleum & Engineering Industry of Pakistan   Muhammad Umair Nazir MPhil Scholar at University of Lahore  Abstract The purpose of this study to measure the impact of capital structure (leverage) on the financial performance of listed companies in the sector of Textile, Automobiles, Sugar, Petroleum and engineering industry of Pakistan. The data was collected for the period of four years from 2012-2015. The data was extracted from the 21 firms for study. The Ordinary least squares models and Correlation are used for analysis the proxies. The results display that leverage measured by Debt to Assets has a statistically significant negative effect on firms’ financial performance measured by Return on Assets at 99.9% confidence interval. Keywords: Financial leverage, Capital Structure, Firms’ performance.  1. Introduction 1.1 Background of the Study Financing decision is very important for the companies and financing is made by the mixture of debt and equity. The mixture of financing is called the capital structure. The debt is the amount, obligations payable to the creditors with in specified period. The Indian Research shows the inverse relationship between the leverage and the company performance, due to the lending institutions are strictly governed by Indian Government (Majumdar, 1997). Jensen & Meckling (1976) had written in their study that conflicts and problems are created between the shareholders and debt providers due to the financial performance. It may lead to smashes due to variety of investment either debt or mix of both (Myers, 1977). Majumdar & Chhibber (1999) had shown an inverse relation between corporate debt and company financial performance. This is due to the high pressure of the agency cost. The similar results were shown by the study of Mahakud & Misra (2009). It was found that during industry recessions when highly geared companies fail to respond the market share to their rivals which were lower geared.   1.2 Research Objective The main objective of this study is to find importance of capital structure and its impact on the performance of Textile, Automobiles, Sugar, Petroleum and engineering sectors. This study will helpful for the company’s directors and managers while making financing decisions.    1.3 Research Question Is there effect of capital structure on financial performance of Pakistan Textile, Automobiles, Sugar, Petroleum and engineering sectors?   2. Literature Review The current literature emphasis the capital structure factors. In developing countries the factors of capital structure depends on the similar variables as are of firms in developed countries. Booth et al. (2001). He accompanied study on ten developing countries.  Singh (2010) had shown the results of his study that capital structure decision depends on the firm’s own characteristics and country’s macroeconomics.  The firm’s capital structure’s means debt, equity or a combination of both and this optimal of structure matters the most. Modigliani & Miller (1958) study had given the basic research on the topic of capital structure. In consistent the firm’s value depends upon the real assets instead of it’s depends on the capital structure. The similar study conducted by (Stilglitz, 1972; Hatfield et al., 1994). The performance is a considerable point of the companies with respect to the company capital structure (Akintoye, 2008). Jensen (1986) had shown the results that which company has more leverage it can increase the financial performance, due to the companies managers are unable to initiate the negative NPV projects.  The pecking order theory with some development brings to the end that absence of information is a major factor. (Fama & French, 2005). Another research conducted by Bharath, Pasquariello & Wu (2006) to conclude that information about the firm level is essential for the sectional analysis but it is not sole factor for the firm capital structure.  Eriotis, Franguoli, and Neokosmides (2002) had shown a negative relation between debt and profitability of European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.26, 2017  19 the companies.  The data had collected from the different sectors of the companies. The study was conducted in Hong Kong’s property sector showed a similar negative relation Chiang, Chang & Hui, 2002). Furthermore a study was conducted in Ghana for examine the relationship between the capital structure and listed companies performance. It had showed that debt to asset and current liabilities to total assets positive effect return on equity while long-term liabilities negatively effects on it (Abor, 2005). Another study had taken in the region of Africa by Kyereboah & Coleman (2007) on micro finance banks; the study examines the effect of capital structure on return on equity and return on assets derived to the conclusion about negative relation between leverage and performance. Leverage is negatively related with the performance, PE ratio depicts an insignificant effect (Zeitun & Tian, 2007). Similar conclusion was shown by the study of DeAngelo & Masulis (1980). It is showing best capital structure tradeoff model. Moreover, there was no relation between debt to asset ratio and non-debt tax shield. The change in the leverage due to the change in the capital structure will lead to increase in the share price. This study shared for the capital structure model by (Harris & Raviv, 1991). The capital structure and dividend policy are used as indication devices. Top-level management can go for making decision of financial policy through the widely available market information, if the market does not give the response of efficiency. The reaction leads to financial distress and capital structure this connection was studies by the Ofek (1993). There are two types of costs that effect to the firm bankruptcy one is that direct and second is that indirect cost. Very few studies have been conducted in developing countries such as Pakistan in which no study done in aforesaid five sectors specifically Textile, Automobiles, Sugar, Petroleum and engineering.  The literature tells us about the different results on the relationship between financial performance and capital structure. Pakistan capital market had optimal level of asymmetric information then other developed countries markets. So in this study we are going to examine the impact of capital structure on the Pakistan firm’s financial Performance listed in Automobiles, Textile and Engineering sector.    3. Methodology 3.1 Research Approach In this study we use the quantitative technique for examine the relationship between the company’s capital structure and the financial performance.   3.2 Research Sample Total twenty one listed firms has been selected for the conducting this research, from Pakistan stock exchange, Pakistan. The data for the remaining one company was incomplete and have been filtered out. Sample consists of 82 observations for period of 4 years i.e. 2012 and 2015. The firms were selected on the basis of availability of the data for the above given years.  3.3 Data Secondary data has been used for this study. Sources of data include:  Annual financial statements  Official announcements from Company’s websites  Pakistan stock exchange and Securities and Exchange Commission website.  3.4. Statistical Technique Correlation has been applied for the relationship between the returns and leverage, moreover regression is to find out the impact of leverage on firm’s return using SPSS.  3.5 Research Model We have used the following regression model for measure the relationship:         ∈++= Leverage*βαAOR   3.6 Hypothesis Ho: There is no relationship between leverage and firm’s financial performance.   3.7 Symbol of Financial performance and its description: Symbol                                Variable                                  Definition                                        ROA                                      Return on Assets=               Profit after Tax/Total Assets   European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.26, 2017  20 3.8 Symbol Variable Definition Symbol                                Variable                            Definition                                        D/A                                   Debt to Assets =                 Total  Debts/ Total Assets In consistent with literature review these variables had used by Majumdar & Chhiber (1999) and Ahmad, Salman & Shamsi (2015) in their research.  4. Data Analysis 4.1 Descriptive Analysis The following table depicts the results of descriptive statistics summary for the dependent and independent variable. Descriptive Statistics  Mean Std. Deviation N ROA .0767 .19395 82 DEBTOASSET .5491 .63072 82 The descriptive statics table depicts the mean of ROA is .0767 and standard deviation is .19395. The mean value of Debt to Asset is .5491 and standard Deviation value is .19395.   Correlations  ROA DEBTTOASSET Pearson Correlation ROA 1.000 -.507 DEBTOAS -.507 1.000 Sig. (1-tailed) ROA . .000 DEBTOAS .000 . N ROA 82 82 DEBTOAS 82 82 The correlation table shows the negative correlation with value -.507 between leverage and the financial performance of the firms which is the significant at the level of 1%. To conclude the results of correlation means increase in leverage will results decrease in financial performance.   4.2 Inferential Analysis Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .507a .257 .247 .16825 a. Predictors: (Constant), DEBTOASSET The above table shows the extent of variability in the dependent variable which has explained by the independent variable.  The value of R2 displays at 0.257 which expresses that around 25.7% of variability of financial performance is described by leverage. Adjusted R2 is around to R2 which means there is no sample error. ANOVAa Model Sum of Squares df Mean Square F Sig. 1 Regression .782 1 .782 27.639 .000b Residual 2.265 80 .028   Total 3.047 81    a. Dependent Variable: ROA b. Predictors: (Constant), DEBTOASSET The overall validity of the model is depicted by ANOVA statistics. The F-stat value is 27.936 which is higher than 4-cuttoff for F-stats. Moreover significant value shows significance of model and explanatory power of the model at 1% level.  Coefficientsa Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) .009 .025  .360 .000 DEBTOASSET -.156 .030 -.507 -5.257 .000 a. Dependent Variable: ROA The table of coefficients shows the slope of the function, sign of the slop displays direction of the European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.26, 2017  21 relationship and magnitude shows intensity of the relationship. The results tell us that if 1% increases in the Leverage it will decrease the return of firm 15.6%. T-stat is 5.257 which is greater than 2-cutt off for t-stat. As the coefficients table shows the associated significance value lesser than 1%, so the model is significant at 1%.   5. Conclusion, Limitation, and Recommendations 5.1 Conclusion The main objective of this study is to analyze the effect of capital structure on profitability of the companies listed in the Textile, Automobiles, Sugar, Petroleum & Engineering sectors of Pakistan Stock Exchange. The above given results have provided the evidence that there is a negative relationship between the financial performance and leverage. Our study indicates that if the leverage increases , the profitability decreases. Parallel outcomes were determined by research done by Eunju and Soo Cheong (2005), Ahmad, Salman & Shamsi (2015). Though a study showed in Ghana indicated a different results due to selection of sample of only top twenty firms due to the lower cost of debt in that countries while high cost of debt in Pakistan. The results display a negative correlation between the Debt to Asset and Return on Asset. Also the research results value of R2 shows that the variability explained is 19.50%, remaining is unexplained.  5.2 Limitation & Recommendations  The data for our research was extracted from 2012 to 2015. The complete data for the particular period was only available for 20 firms. So this study can be extended through the availibity of complete data and the time period can be increased. So in this direction the sample will produce more accurate results. This is recognized these sectors have more trading in the stock exchange and have high leverage in our country Pakistan.   6. References  Abor, J. (2007). Debt Policy and Performance of SMEs: Evidence from Ghanian and South African Firms.  The Journal of Risk Finance, 8(4), 364-379. Adelegan, O. (2002).The Pecking Order Hypothesis and Corporate Dividend Payout: Nigerian Evidence. African Review of Money Finance and Banking, 75-94. Ahmad, N., Salman, A., & Shamsi, A.F. (2015). Impact of Financial Leverage on Firms’ Profitability: An Investigation from Cement Sector of Pakistan. Research Journal of Finance and Accounting, 6(7), 75-80. Baker, S. H. (1973). Risk, Leverage and Profitability: An Industry Analysis. The Review of Economics and Statistics, 55(4), 503-507. Baltagi, B.H. (2008).Econometric Analysis of Panel Data, New York: John Wiley & Sons. Baxter, N. D. (1967).Leverage, Risk of Ruin and the Cost of Capital. Journal of Finance, 22(3), 395-403. Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing Countries. Journal of Finance, 56(1), 87-130. Cheng, M. (2009). Relative Effects of Debt and Equity on Corporate Operating Performance: A Quantile Regression Study. International Journal of Management, 26(1), 142-145. Dierkens, N. (1991). Information Asymmetry and Equity Issues. Journal of Financial and Quantitative Analysis, 26(2), 181-200. Fama, E.F., & French, K.R. (1998). Taxes, Financing Decisions, and Firm Value. Journal of Finance, 53(3), 819-843. Guha Khasnobis, B. & Bhaduri, S. (2002). Determinants of capital structure in India: A Dynamic Panel data approach, Journal of Economic Integration.17, 764-776. Mahakud, J., & Misra, A.K. (2009). Effect of Leverage and Adjustment Costs on Corporate Performance: Evidence from Indian Companies. Journal of Management Research, 9(1), 35-42. Majumdar, S.K. (1997). Debt, Where is Thy Sting? Leverage and Corporate Performance. Economic and Political Weekly, India, 32(8), 21-24. Majumdar, S.K., & Chhibber, P. (1999). Capital Structure and Performance: Evidence from A Transition Economy on an Aspect of Corporate Governance. Public Choice, 98, 287-305. Majumdar, S.K., & Sen, K. (2010).Corporate Borrowing and Profitability in India. Managerial And Decision Economics, 31, 33-45. Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 32(2), 261-275. Myers, S. C. (1977).Determinants of Corporate Borrowing .Journal of Financial Economics, 5(2), 147-175. Myers, S. C., & Majluf, N.S. (1984). Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 13(2), 187-221. Myers, S.C. (1984).The Capital Structure Puzzle .Journal of Finance, 39(3), 575-592. Noe T.H. (1988). Capital Structure and Signaling Game Equilibria. Review of Financial Studies, 1, 331-355. Opler, T.C., & Titman, S. (1994).Financial Distress and Corporate Performance. Journal of Finance, 49(3), European Journal of Business and Management                                                                                                                               www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.9, No.26, 2017  22 1015-1040. Penrose, E.T. (1959).The Theory of the Growth of the Firm. Oxford: Basil Blackwell. Ross, S.A. (1977). 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Impact of Capital Structure on Firm’s Financial Performance: Textile, Automobiles, Sugar, Petroleum & Engineering Industry of Pakistan

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