Abstract
This paper is an attempt to look into the issue of the effect of leverage
and adjustment costs on various measures of corporate performance
for three hundreds and seventy four non-financial firms listed on
Karachi Stock Exchange of Pakistan. This study covered only Pakistan
equity market. A panel data set spanning 1988 to 2008 is used for the
purpose. The Arellano and Bond dynamic panel data estimation
technique (a variant of GMM) is used to capture the role of adjustment
costs and the dynamic behavior of corporate performance. The results,
thus obtained, are essentially mixed. The coefficients of the adjustment
variable (lagged corporate performance) are positive for ROCE
(Return on capital employed) and EPS (Earnings per Share) but
ironically negative for ROE (Return on Equity). Similarly the effect of
leverage on ROCE is negative but insignificant and positive significant
when EPS is used as a measure of corporate performance. Whereas the
relationship between leverage and ROE (another measure used in the
paper for corporate performance) is negative and significant which
implies that high leverage force the managers to perform optimally due
to higher interest burden and agency cost. The negative effect of
leverage is consistent with dynamic picking order theory that increase
in debt reduce firms value by reducing its safe debt capacity and causes
underinvestment in the long run. The positive effect of the size of a firm
on performance is confirmed for all the three measures of corporate
performance. Furthermore, the positive and statistically significant
impact of short term liabilities implies that high short term liabilities
exert pressure on corporate managers to perform efficiently in the
competitive market. In Pakistan equity market the leverage overall
impact on corporate performance was positive indicating that firms
can increase profits through debt financing instead of equity financing.
The current study was among the few that used The Arellano and Bond
dynamic panel data estimation technique (a variant of GMM) to
investigate corporate performance
Shah Khalid, Arshad Ali, Qadar Bakhsh Baloch, Nazim Ali. (2014) Analysis of the Impact of Leverage on Various Measures of Corporate Performance, using Arellano and Bond Dynamic Panel Data Estimation Technique, Abasyn Journal of Social Sciences, Volume-07, Issue-1.
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