Financial Leverage,Energy Crisis And Firms Performance:Evidence From Pakistan

The understanding of financial leverage assists companies in assessing their financial needs,borrowing capacity and ability to generate returns to maximize performance.Therefore,the understanding of financial leverage is important not only for firms to assess their borrowing and financial needs but also for policymakers to extend the strategic directions with regard to the capital structure.Additionally,energy plays an important role in various sectors such as businesses,manufacturing,health,education,agriculture,and other service sectors.As a necessity of life,energy has a significant impact on economic growth and has become the reason for social uplift.Energy has become the main reason for a country’s development and progression.Alongside Pakistan,many third world countries have suffered from adverse effects of energy crisis.In Pakistan,such crises have plagued the industrial sector,minimized exports,reversed foreign investment,reduced agricultural yield,and increased prices led to closure of businesses and services,and increased unemployment.Pakistan’s economy has had to compensate for huge costs caused by energy shortages in the country.The purpose of this study was to measure the impact of financial leverage,energy crisis,energy consumption,energy price and access to electricity on the performance of 424 Pakistani nonfinancial listed companies over the 2001–2017 period.Three measures of financial leverage,i.e.,short-term debt(STDL),long-term debt(LTDL),and total debt(TLEVR),and energy crisis categorized into,four measures of electricity shortfall(i.e.,neutral period(NP),increasing shortfall(IS),worst shortfall(WS),decreasing shortfall(DS),energy consumption(EC),energy price(EP),and access to electricity(ATE))were applied to examine their impact on six performance measures,i.e.,sustainable growth(SGR),Tobin’s Q,return on assets(ROA),return on equity(ROE),return on sales(ROS)and asset turnover ratio(ATO).The fixed effect(FE)and generalized method of moments(GMM)is used for robust analysis report a significant negative impact of financial leverage on performance.The results also confirm an inverted U-shaped relationship between financial leverage and performance,indicating that an increase in the financial leverage of Pakistani listed companies increases their performance up to a certain level,and after that,a further increase in financial leverage decreases their performance.The results further suggest that STDL is a main contributing source of debt that causes a higher risk of refinancing for companies and thus negatively affects performance.The results relating to energy crisis confirmed the negative impact of energy crises on business performance,where IS,WS,and DS significantly reduce performance by39%,36%,and 33%,respectively.In addition,NP exerts a significantly positive impact on profitability,where a 1% increase in NP increases profitability by 33%.EC has positive impact on performance while,EP and ATE has negative impact on performance.The results concluded that energy supply is highly critical for business performance.This study’s findings are useful for academics,management,policymakers,and regulators to understand the importance of financial leverage and to choose between STDL and LTDL to fund financial and impact of energy crisis,energy consumption,energy price and access to electricity on the performance of Pakistani listed companies.It is hoped that the study contributes by providing useful insights into the determinants that drive the firm performance in emerging economies in particular and in other economies in general.