Effect of Leverage on Financial Performance of Listed Firms in the Pakistan Securities Exchange

Abstract

The business environment in Pakistan, especially for listed companies on the Pakistan Stock Exchange (PSX), is competitive and uncertain, and requires a well-done financial performance for business survival and development. Even though the policy makers and business community makes different efforts to create a conducive environment for business, still the difference in financial performance of companies is noticeable where some companies are performing better whereas some have decreasing their profitalike. This has motivated further research on firm-specific issues, for example, financial leverage, but the work has not set a clear path for the managers and practitioners to set optimal financing strategies. The main objective of this research work is to examine the effect of leverage on Financial Performance of Listed Companies of Pakistan Stock Exchange especially in the context of financial and non-financial firms. The type of research used is a panel study and the data used is secondary data that comes from the financial statements of 20 companies for the period 2021-2025. ROA, ROE and the debt ratio represent financial performance and leverage respectively. Panel data regression techniques such as Fixed Effects (FE) and Random Effects (RE) were used to analyse the data, and the choice of the model was determined using the Hausman test. Descriptive statistics, correlation analysis, Fixed Effects and Random Effects panel regression models were used to analyze the data. Hausman test was used to decide on the model of estimation. Results show that leverage varies in impact by industry. Leverage has a significant negative impact on ROA and significant positive impact on ROE for financial firms. In non-financial entities, there is a positive and significant relationship between leverage and ROA as well as the ROE measure. From hausman test, the results show that the Random Effects model is the best estimator.