This research study is carried out to determine the impact of capital structure mainly debt financing on firm performance incorporating panel data of 70 textile companies in Pakistan from the year 2010-2015 respectively. Relationship between firm performance (ROA) and capital expenditure (DTA, LDA and STD) is determined using the Fixed Effects Model. Statistical results present a positive relationship among return on assets and debt-to-asset ratio. This suggests that firms mainly rely on financial leverage for their performance. Furthermore, it holds a negative relation between short term debt and firm performance measure (ROA) still resulting in more short term borrowing because of the lower interest rate. Results further emphased a positive relationship between Long-term debt to assets and return on assets, means that the textile firms which are heavily trapped in debt must bear huge interest costs. Firm's sales growth and interest rates have a positive and significant effect whereas the firm size has a negative but significant impact on its return on assets. Variables for political uncertainty and sub-sector/industrial effect is also incorporated to identify their impacts on firm performance respectively.
Keywords: Financial leverage, Panel data, Return on Assets, Textile, Pakistan, capital structure, Debt policy