Relationship of Earning Volatility and Capital Structure under Mediating Role of Financial Distress and Moderating Role of Firm Size

Abstract

 The paper examines the mediating role of financial distress and the moderating role of firm size, thus contributing to existing literature by analyzing the impact of impact of earning volatility on capital structure. Panel data analysis of 290 non-financial companies listed on the Pakistan Stock Exchange (PSX) from 2019 to 2024 is conducted. The study finds that the direct impact of earnings volatility on the capital structure is insignificant and that larger firms suffer less financial distress but are more sensitive to earnings volatility. Results from mediation analysis reveal that financial distress fully mediates the relationship between earnings volatility and capital structure and the result of moderation analysis reveals that the effect of earnings volatility on financial distress is limited but significant. Corporal managers will gain a clearer understanding of the relationship between volatility of earnings and financing decisions; investors will be able to better appreciate how likely a firm is to experience an earnings shock; and research findings will be used by policymakers to design regulatory policies that will help to ensure financial stability in uncertain economic times.