Does the Firm Size Influence the Leverage? An Evidence from Textile Industry of Pakistan

Abstract

The relationship between the size of a firm and its leverage is one of the most hotly debated topics in corporate finance. This study aims to investigate this link within the framework of Pakistan's textile industry. The data from fifty textile businesses that trade on the Pakistan Stock Exchange were analyzed over three years, beginning in 2016 and continuing through 2018. For a panel data analysis, monetary information on firm size (as determined by the natural log of total assets) and Leverage (as determined by the debt-to-asset ratio) were used as the primary variables of interest. The data analysis carried out in the textile industry in Pakistan indicates a striking trend: Companies' dependence on Leverage, which refers to the utilization of borrowed money, grows as the size of the firms decreases. This hypothesis proposes that when looking for extra capital, businesses would instead seek it using existing internal cash and debt rather than by issuing new shares. The results have important implications for the textile industry in Pakistan, and those implications are enormous. In particular, smaller businesses need to be aware of the increased amounts of debt they carry and carefully consider their choices about their capital structure. These choices may have far reaching effects on both the financial stability and the development possibilities of the firm; as a result, they need rigorous consideration to guarantee alignment with the organization's strategic goals and risk management strategies.