Influence of Capital Structure on Firm Financial Distress of Shariah Compliant Firms in Pakistan

Abstract

Capital structure choice is some of those factors that may influence the firm’s financial health. This study evaluates the effect of capital structure on firm financial distress of Shariah compliant firms in Pakistan. This empirical analysis contains 238 listed Shariah non-financial firms of Pakistan during the period of 2015 to 2022. The study finds a negative linkage between capital structure and firm financial distress of Shariah compliant firms. The outcomes of this study have practical implications for managers, investors, authorities, and researchers. Managers should be aware of debt financing because it is one of the major causes of firm financial distress. Managers should also embrace the financial position as their top agenda because financial position helps to establish good relationships with various stakeholders which helps to facilitate a firm’s access to alternative sources of finance and decrease the firm usage of debts, hence reducing the probability of firm financial distress. Investors should consider their financial position when making investment decisions because a strong financial position decreases default risk which serves as potential protection for investments.

 Keywords: Capital structure; shariah compliant; financial distress.