Impact of Leverage on Firm Financial Performance: Evidence from Pakistan

Leverage, an important concept in corporate finance, has a significant impact on a company's financial performance and has generated significant academic attention. This article explores the intricate relationship between leverage and the financial performance of firms. Analyzing data from 2016 to 2023, including 184 observations across 23 companies in Pakistan's food and personal care products industry, this study provides insights into the influence of leverage on financial performance. The paper reveals distinctive insights into the relationship through comprehensive empirical analysis. The study provides evidence that supports the signaling theory paradigm, specifically showing a strong negative relationship between leverage and firms financial performance in Pakistan. The study also shows how capital structures vary among industries, emphasizing the complexity of financial decision-making in different company situations. This study also examines how corporate governance moderates the leverageperformance nexus. Leverage negatively impacts Return on Assets (ROA), especially in organizations with strict governance systems. These findings demonstrate the complex link between leverage strategies and governance mechanisms and the importance of strong governance frameworks in reducing leverage's negative effects on financial measures like ROA. This highlights the importance of robust governance to mitigate leverage's negative effects on corporate financial performance.