Financial Leverage, Distress, and Firms Performance: Global and Local Perspective

Abstract

Purpose: This study examined the effect of financial leverage on firms’ performance. The study examined the phenomenon in the background of financial crisis. Methodology: For detailed investigation, the study selected 1879 firms from different countries of the world. In the meantime, the study selected a sample of 263 firms from domestic economy of Pakistan. Firm level secondary data of 2005-2012 were used for analysis purposes. Panel regression model is applied, and interactive dummy were added to probe the effect of leverage in crisis period. Findings: The study found a negative effect of leverage on firms’ performance. During the crisis period, leverage remained helpful to absorb the negative effect of crisis on firms selected from different countries. The similar trend for firms in Pakistan was, however not observed. Based on study results, it is concluded that the leverage plays a substantial role in firms and extreme care is needed in its adjustment. Furthermore, behaviour and dynamics of firms in Pakistan are different from many other countries. Implications: The local dynamics and circumstances should be considered in designing the capital structure of the firms.