Financial Leverage and Corporate Performance: Does Financial Crisis Owe an Explanation?

Abstract

The objective of this study is to investigate the impact of financial leverage on corporate financial performance of Pakistan's textile sector from 1999-2012 using panel data. The leverage-performance relationship is examined with a special focus on the Global Financial Crisis of [2007][2008]. Both accountingbased (Return on Assets -ROA) and market-based (Tobin's Q) measures of corporate financial performance are used. Regression analysis is performed with and without inclusion of financial crisis dummy. Total Debt to Total Assets (TDTA), Long Term Debt to Total Assets (LDTA), Short Term Debt to Total Assets (SDTA) and Debt to Equity (DE) ratios are used as proxies for financial leverage whereas firm's size and firm's efficiency are used as control variables. The results indicate that financial leverage has a negative impact on corporate performance when measured with ROA. Whereas in case of Tobin's Q, SDTA coefficient is positive. It can be concluded that since cost of borrowing is high in Pakistan and debt capital markets are less developed, firms are forced to resort to banks as their source of debt finance and thus have to repay huge amount of principal and interest which has a heavy toll on their financial health. In addition to this, financial crisis was found to have a negative impact on corporate performance and also affect the leverage-performance relationship.

Empirical evidence on the relationship of capital structure and the value of the firm among Mexican public firms

“…Alternatively, a negative relationship may result due to the inefficiencies from the size of large firms, or diseconomies of scale (Jawad et al 2015;Kouki & Said, 2011;Wippern, 1966). In the same way, Chaudhry & Sam (2014) found a negative relationship between firm size and stock returns.…”

“…That seeming contradiction of terms may be explained either because of different measures of the value of the firm and/or its capital structure, or because there is a threshold on leverage's influence on firm value. Some interesting examples include Jawad et al (2015), Cheng & Tzeng (2014), Sheikh & Wang (2013), Lin & Chang (2011) and Iturriaga & Crisostomo (2010). A more comprehensive overview of these works is included in Table A1 in the Appendix.…”

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Impact of Operating Spread on Firm s Performances: Evidence from Sri Lankan Manufacturing Companies

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