The Impact of Financial Structure on Firms’ Profitability: A Study of the Non Financial Sector in Pakistan

Abstract

This research investigates the impact of financial structure on the profitability of non-financial firms listed on the Pakistan Stock Exchange (PSX). The objectives include examining the effects of micro-level, sector-level, and macro-level financial structures on profitability. To achieve these goals, the study utilized a comprehensive methodology, analyzing secondary data from 2008 to 2023. Data sources included annual reports, the PSX database, and other reliable financial databases. The sample comprised 120 non-financial firms from six major sectors: automobile, cement, chemical, energy, sugar, and textile. Various statistical techniques were employed, including descriptive statistics to summarize data and panel data regression models (pooled OLS) to assess the impact of financial structure on profitability. Key findings revealed that short-term debt (STD) negatively impacts profitability, while retained earnings (RE) positively influence it. Shareholder equity (SE) showed a negative relationship with profitability, suggesting potential inefficiencies or higher costs associated with equity financing. The Herfindahl-Hirschman Index (HHI), measuring market concentration, did not significantly affect profitability. However, munificence (MUNIF), indicating resource availability, negatively impacted profitability, possibly due to inefficiencies in resource-rich environments. Interest rates (IR) were linked to reduced profitability due to increased borrowing costs, while inflation (INF) had a positive impact, suggesting firms could pass on increased costs to consumers.