Abstract
This study investigates the moderating effect of the Central Bank’s interest rate on the relationship
between financial leverage and firm profitability. The study uses panel data of Pakistani firms listed
on Pakistan Stock Exchange for the period 2009-2016 with fixed effect regression analysis. Firm
profitability is used as a dependent variable and is measured by EBIT and ROE while leverage and
Central Bank’s Interest Rate (SBIR) are used as Independent variables. Results show that leverage is
negatively associated and statistically significant with firm performance (FP) while SBIR is negatively
related but this relation is statistically not significant. This imply that SBIR has no direct effect on firm
performance. The important factor is the composite effect of leverage and SBIR on FP, which is
negative and statistically significant. These results imply that the central bank’s policy of discount
rates has an indirect effect on FP as this policy affects lending decisions of the firm. All these findings
are consistent with previous studies. The study adds to the existing literature of banks interest rates
and leverage in the sense that when government increases interest rates, it indirectly affects the firm
performance as a firm may or may not be able to get credit from these financial institutions. Thus,
government and policy makers are to take into account firms’ performances and overall capital
market while changing he interest rates of the country.
Adnan Ahmad, Pir Bilal, Ihtesham Khan. (2019) The Resilience of Central Bank Interest Rate on the Association of Financial Leverage and Firm Performance, Abasyn Journal of Social Sciences, Volume-12, Issue-1.
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