Effect of Leverage on Profitability and Market Performance in the Manufacturing Sector of Sri Lanka: A Panel Regression Analysis (original) (raw)
Related papers
2016
This paper investigated the financial leverage on firms' value. The main objective was to compare the value of the firmsof the listed manufacturing companies in Sri Lanka by using the financial leverages for estimations. The necessary data was collected from secondary sources. A sample of ten listed manufacturing companies was considered with 50 observations for the period 2011-2015. Financial ratios were calculated and statistical tools including Pearson's correlation, descriptive analysis of variance and regression analysis were utilized in testing the hypotheses and to measure the differences and similarities between the manufacturing companies according to their different characteristics. However, the results indicate that there is a significant relationship between DE ratio and ROA. According to Pearson correlation, there is a weak negative relationship between DE ratio and ROA. And also, there is not a significant relationship between DE ratio and ROA. It is recommende...
This study is aimed to examine the impact of leverage on shareholders’ return of selected listed manufacturing companies on Colombo stock exchange (CSE) in Sri Lanka. Leverage is the proportionate ratio of debt and shareholders’ fund that influence the return of shareholders of a firm. No of researchers have been conducted over the years on these issues. The present study considered Leverage as the independent variable which measured by debt to equity(DE), debt to total asset(DTA) and shareholders’ return as the dependent variable which measured by return on shareholders’ fund (ROSF), earning per shares (EPS), and dividend yield(DY). The sample of this study has been examined the twelve manufacturing companies listed on CSE over a period of five years from 2008 to 2012. The required data and information for the study were gathered from published annual reports, fact book, and website of listed companies in CSE from 2008 to 2012. Correlation and regression analysis were used to find out the relationship and state the impact between leverage and shareholders’ return. Analyzed results revealed that suggest there is a negative relationship between all variables other than debt to total asset and earnings per share. Key words: Leverage, shareholders’ return, Colombo Stock Exchange.
Factors influencing companies’ leverage: evidence from listed manufacturing companies in Sri Lanka
2016
The purpose of this study was to find the factors that influence on financial leverage of Sri Lankan listed manufacturing companies. The sample covered 33 manufacturing companies listed in Colombo Stock Exchange (CSE) and the analysis was based on the year end observations of five years from 2011-2015. Panel data analysis was used and profitability, tangibility, growth rate, and firms’ size were analyzed as the determinants of the companies’ financial leverage. Tangibility significantly impact on long term leverage; Profitability and Firm’s Size was confirmed to be a relevant determinant to total leverage. More profitable companies would tend to have fewer debts, since they use the retained earnings rather than debts. This evidence is support to the pecking order theory. High growth firms are more likely to use long-term leverage. These companies use more short term loans than long term loans. The lack of developed long-term debt market may be the main reason for this situation in S...
Affect of financial leverage on firm performance. Empirical evidence from Karachi Stock Exchange
Mpra Paper, 2013
Using panel data analysis, we attempt to find the determinants of capital structure of KSE listed none-financial firms for the period 2004-2009. We first present some descriptive statistics on our selected variables. The most interesting finding of our descriptive statistics is the highest leverage ratio for textile industry whereas the average profitability of textile industry is negatives. The results of this study shows negative relation between performance and leverage. Long term debt is more expensive due to certain direct and indirect costs. Therefore employing high level of debt results low profitability. The result of second hypothesis shows no significance between leverage and profitability. On the basis of these findings it is concluded that profitability is consistent with picking order theory. In the light of above discussion we can say that the existing theories of capital structure contribute to some extent in decision making process.
Investment Management and Financial Innovations, 2021
The purpose of this paper is to examine the determinants of financial performance, firm liquidity and financial leverage of Indian listed firms. This study uses both static models (pooled, fixed, and random effects) and Generalized Moment Methods (GMM). Financial leverage (FINLE) is defined by the ratio of total liabilities to total assets, whereas the current ratio and the quick ratio are used as firm liquidity factors. Further, a set of financial performance determinants such as return on assets, profit after tax, return on capital employed, return on equity, and Tobin-Q are used as independent factors. The results indicated that profit after tax, return on equity, return on capital employed, and Tobin-Q are the most significant financial success variables that influence financial leverage of Indian listed companies. Furthermore, profit after tax, return on capital invested, return on equity, and Tobin-Q are considered to have a substantial effect on financial leverage among the f...
SSRN Electronic Journal, 2017
This research of the relationship of firms' financial leverage with firms' performance is based on six year (2008-2013) financial record of 151 textile companies. The net profit before tax (NPBT) has been used as proxy to represent the firm profitability while total debt as a ratio of total equity has been defined as financial leverage. Of the total, 17 firms (11%) have been found with negative NPBTs, 36 firms (24%) have positive NPBTs and 98 firms (65%) have mix NPBTs (having positive for some years and negative for some years). The trend analysis suggests that on average financial leverage of negative NPBT yielding firms remained at-28.756 and increased by 2.747 every year during the period of 2008 to 2013. While the average leverage of mixed NPBT yielding firms remained positive at 1.939 and increased by 0.174 every year, and the average leverage of positive NPBT yielding firms remained at 1.547 and decreased by 0.007 every year during the studied period (2008-13). Leaving negative NPBT yielding firms aside, the average leverage of mixed NPBT yielding firms is higher (1.939) and has been being increased (0.174 per year) while that of positive NPBT yielding firms is relatively lower (1.547) and has decreased (0.007 per year). suggest that there is an inverse relationship between leverage and profitability; for every one unit of leverage (L) increase, profitability (NPTA) decreases by 0.016 units. The results of the Quadratic form are reproduced, as follows: NPTA = 0.122-0.036L + 0.003L 2. Taking the F.O.C, and solving for L helps us estimate L = 6. These results suggest that with L = 0, the NPTA estimates at 0.122 (net profits are 12.20% of total assets) and with L = 6, NPTA minimizes at 0.014 (net profits drops to 1.40%). The existence of statistically significant inverse relationship between firms' profitability and financial leverage persuades one to recommend that financial leverage be kept and managed as low as possible for greater firms' profitability.
Asian Social Science, 2018
The study strives to examine the effect of financial leverage on financial performance in a developing country context using two OLS regression models based on panel data consisting of 816 cases (48 companies x 17 years). Financial performance is measured using ROA, ROE, EPS, and Tobin’s Q, and financial leverage is measured using the debt-assets ratio and debt-equity ratio. It is observed that ROA and Tobin’s Q are negatively correlated with financial leverage, which is in line with the assumptions of the pecking order theory, market timing theory, and many empirical studies. However, financial leverage has a positive effect on ROE and no effect on EPS. These results are also consistent with the MM theorem, static trade off theory and many other empirical studies. Yet again, the two OLS models have put forward conflicting results while taking EPS as the dependent variable. The results corroborate the inefficient use of debt capital and suggest the need to improve the re...
The Effect of Financial Leverage on the Performance of Quoted Manufacturing Companies in Nigeria
2018
The debt-to-equity ratio of a firm determines how cash flows will be shared between equity holders and debt holders. Financial managers face difficulty in determining the optimal leverage. The main objective of this study is to determine the effect of financial leverage on the performance of quoted Manufacturing firms in Nigeria. The sample data was extracted from 92 manufacturing companies registered by the Nigerian stock exchange (NSE) from the period 2007 to 2016. Return on Equity (ROE), Return on Asset (ROA) and Return on Investment (ROI) represent performance of dependent variables. While Debt/Equity ratio represent financial leverage as independent variable. Simple Least Square regression method was used as a tool of data analysis and findings of the paper reveal that, Debt to equity ratio has insignificant effect on the performance of quoted Manufacturing firms in Nigeria, it also shows a positive effect relationship between financial leverage and Debt to equity ratio. The co...
Influence of Financial Leverage on Corporate Profitability: Does it Really Matter?
International Journal of Economics and Financial Issues
Debt is an essential component of capital structure for firms. Companies use leverage to impact the returns that equity shareholders yearn for. In this study, the author attempts to establish a stochastic relationship between the use of leverage and the profitability of cement manufacturing firms worldwide primarily to assess whether leverage affects firm profitability. The study extends further to examine whether the level of debt affects the return on equity, return on assets and net profit margin in similar ways, as they are all proxies of profitability. The empirical analysis is performed on data from major cement companies listed on public exchanges worldwide. The data is collected from 2012 to 2018 with the sample size of the thirteen most prominent companies in the world in the cement manufacturing industry for seven years consisting of ninety-one observations. Panel data regression analysis using the fixed effect model is applied to the data to investigate the relationship b...
FINANCIAL LEVERAGE, CAPITAL STRUCTURE AND FIRM PROFITABILITY: AN EMPIRICAL REVIEW
Shodhasamhita : Journal of Fundamental & Comparative Research, 2022
The study examines the existing empirical research works pertaining to financial leverage and its impact on firm's profitability. The review considers the determinants of financial leverage as a part of capital structure decisions of firms. The theories of capital structure are considered as crucial in corporate financing decisions and in many research studies the capital structure theories explained the importance of debt financing. The review upholds the importance of financial leverage on firm profitability and researcher has made an attempt to trace out the determinants of leverage. The review is based on the research work done so far on leverages and its impact on firm profitability were majorly considered and those works related to leverage , firm profitability and determinants of leverage are the main key words used to do review , with the help of well defined inclusion and exclusion criteria. Research Methodology: The present study is based on empirical reviews and secondary data has been collected from various sources like peer-reviewed journals, Scopus indexed journals and books were considered and also used working papers on leverages etc. it is a descriptive and conceptual research paper on financial leverage, Capital structure and its impact on firm profitability. Results: The findings of the study revealed that factors such as growth rate, liquidity, tangibility have significant impact on leverage and other factors like firm size, profitability also have positive association with leverage in few studies.