Impact of Firm's Leverage on Financial Performance: Evidence from the Pharmaceuticals Industry of Bangladesh

Abstract

Purpose: The objective of this study is to study the connection between leverage and the financial performance of DSE-listed pharmaceutical firms in Bangladesh.
Design/Methodology/Approach: The data of six firms for the period 2001 to 2020 was analyzed using panel econometric analysis techniques, namely the feasible generalized least square (FGLS) regression model.
Findings: The empirical findings show that long-term debt (LTD) has a significant negative impact on both indicators of the firm’s financial performance—return on capital employed (ROCE) and return on equity (ROE). The control variables GROWTH and AGE are positively related to ROCE and ROE; however, the firm’s SIZE is negatively connected to the firm’s financial performance.
Practical Implications: These findings suggest that the degree of leverage significantly impacts the firm’s financial performance. As a consequence, while constructing the capital structure, corporate managers should carefully control the debt level—both short- and long-term.
Originality/Value: This is the original work done by the researchers which adds value to existing knowledge in corporate finance.
Research Limitations: This analysis was conducted using only secondary data and a sample of six DSE-listed companies over twenty years.