Financial Leverage And Firms’ Investment Decisions: Evidence from Banking Sector of Pakistan

Abstract

This paper aims to find out the effects of financial leverage on firms’ investment decisions in the Banking Sector of Pakistan. Utilizing panel data techniques along with common effects, fixed effects, and random effects for listed banks from 2006 to 2013, the results indicate that leverage is having no significant effect on the investment decision of banks in Pakistan and hence we support Modigliani and Miller (1958) proposition of Irrelevance theory. To current study is going to provide useful insights to banks and investors that investment decision is irrelevant to the way company is financed, rather banks must focus on other factors such as interest rates, available cash flow, profitability which are found to be relevant to the investment decision. It will also serve as basic literature for future research.