This study is an empirical investigation into the impact of leverage deviations from the target on growth of companies listed on the Karachi Stock Exchange (KSE). It is posited that leverage variance impedes the growth of firms. The role of leverage deviations from the target on firms’ growth is analyzed by applying dynamic panel methodology of firms’ level annual accounting data. The results indicate that size of the firm, profitability, collateral values of assets, non-debt tax shield, firm-specific interest rate and spontaneous finance are significant determinants of the target leverage. It is found that firms, seldom have actual leverage equal to the target leverage, and more often the actual leverage deviate from the target level. This deviation, adversely affects the growth of firms. The empirical results indicate that upward deviation and downward deviation affect the company’s growth, differently. It is concluded that over-levered firms’ growth is more sensitive to leverage variance as compared to the under-levered firms.
Key words: Capital Structure, Financial Performance, Target Leverage, Adjustment Speed.