An attempt was made to analyze the impact of capital structure on firm performance of 63 companies listed on Karachi Stock Exchange. Data comprised of 5 years, 2007 to 2011. Balance Sheet Analysis issued by State Bank of Pakistan was used for data collection. Fixed Effects Model was used as pooled regression model to find the relationship between firm performance (ROA, ROE, ROS) and capital expenditure (DTA, EQA, LDA). Results showed that there does exist a relationship but direction of the relationship was mixed. Capital structure showed positive impact on firm performance when retrun on assets (ROA) was used as dependent variable. When return on equity (ROE) was used as dependent variable then debt over assets ratio (DTA) showed positive impact but equity over assets ratio (EQA) and long term debts over assets ratio (LDA) revealed negative impact over dependent variable and when retrun on sales (ROS) was used as dependent variable then DTA and EQA showed negative link to ROS but LDA revealed positive impact over ROS. It was proved that capital structure has impact over firm performance so managers should adopt necessary carefulness while taking decisions regarding capital structure.
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