In “The Relationship between Capital Structure and Firm Performance: New Evidence from Pakistan” by Islam and Iqbal, it is stated that financial decisions affect the company’s efficiency, making them a problem for management organizations (2022). An important place in corporate finance is given to the capital structure, the control of which is an important strategic task to achieve the goal of maximizing income. The article considers the need for a theoretical explanation of the negative influence of the capital structure on the company’s performance.
The research method used in the article included the study of the impact of accounting indicators on business efficiency research using logical conclusions. The researchers resorted to a two-stage systematic approach using data from 285 non-financial enterprises over 20 years of operation (Islam & Iqbal, 2022). The method used was explained by the high level of endogeneity, which significantly affects the evolution of phenomena and structures. The research is based on secondary data, mainly from documents of the State Bank and other non-financial organizations listed on the Stock Exchange (Islam & Iqbal, 2022). The analysis was based on many empirical studies, which are opposed to theoretical conclusions about the positive influence of considered structure on the firm’s efficiency.
In the course of the study, ambiguous results were obtained, which did not give a clear decision on financing at the expense of debt or equity. Nevertheless, the total number of studies confirming a negative relationship between leverage and firm performance exceeds that of studies demonstrating a positive or insignificant relationship (Islam & Iqbal, 2022). The analysis of the article empirically confirmed that leverage reduced business efficiency and acted as a moderator of financial success. This trend was associated with the size of the company, where the mentality of managers could reduce the overall efficiency.
The study of this article helped me to look at the difficulties of using the capital structure and its practical impact on the firm on the example of Pakistani entrepreneurs. Markets are imperfect and are influenced by many external factors regularly forcing them to take financial risks. Nevertheless, the company’s internal management and the capital structure’s success are no less important in improving overall efficiency. The influence of the firm’s size on the control of the capital structure, although it does not have sufficient theoretical justification, showed the potential for study.
The conclusion about the relationship between the size of the organization and its structure is a logical result of the empirical studies presented in the article. Larger firms have greater and easier access to debt, which means that their managers focus on increasing the absolute amount of profit. At the same time, managers of small firms are trying to maximize the rate of return due to limited access to capital markets. Different ways of thinking lead to obvious changes in the internal structure. Against the background of such an internal policy, managers of large firms may be inclined to use inefficient investments, which explains the decline in the company’s performance.
Since the study focuses mainly on the constraining role of the firm’s size between the capital structure and accounting indicators of its financial performance (Islam & Iqbal, 2022), it has some limitations. A decile methodology could improve the results by moderating the theoretical and empirical conclusions obtained. Future research may also reveal the role of firm size between capital structure and market performance. This article still presents the studied connection as a hypothesis due to the small amount of confirmation by theoretical studies. Consequently, a large evidence base will be needed to confirm the research conducted in the article.
Reference
Islam, Z. U. & Iqbal, M. M. (2022). The Relationship Between Capital Structure and Firm Performance: New Evidence from Pakistan. The Journal of Asian Finance, Economics and Business, 9(2), 81-92. Web.