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.
