Exploring the Nonlinear Relationship Between Leverage and Corporate Profitability Vol. 13, Issue 01

Abstract

This study uses a nonlinear Hansen threshold regression model to analyze the link between leverage and corporate profitability, with firm size as a threshold variable. Data for the study is collected from the State Bank of Pakistan and firms’ annual reports for the period 2010– 2020. Our findings reveal important insights and patterns pertaining to the interrelationship between leverage, firm size, and corporate profitability. More specifically, results reveal that there are no threshold effects of firm size on the leverage-corporate profitability relationship. This study contributes significantly to the literature, as most empirical studies in this area use linear models but fail to provide meaningful explanations. This study is useful for managers and policymakers as it provides valuable insights about the intricate interrelationship between firm size, leverage, and corporate profitability.