The Impact of Financial Leverage on the Financial Performance of the Firms Listed on the Tokyo Stock Exchange

Abstract

Japan is widely regarded as one of the world’s most developed nations. The country’s electronics industry, in particular, is consistently ranked among the global leaders in innovatiion. Industries such as automotive, construction, electronics, metal, and telecommunications, companies have traditionally leaned more heavily on debt financing for both their day-to-day operations and investment endeavors, rather than relying on equity financing. In Japan, debt financing is favored as cost-effective source of capital compared to equity financing. The study selected 257 automotive, construction, electronic, metal, and telecommunications companies between 2000 and 2021. To find the effect of financial leverage on financial performance, the study used the random effect and the GMM to estimate the effect of the firms’ leverage on financial performance. The study found that interest coverage has a positive and statistically significant effect on ROA, ROE, and Tobin’s Q. The study discovered that cash coverage has a positive and statistically significant effect on ROE. The study found that debt service obligations have a negative and statistically significant effect on financial performance.

Does board gender diversity play an important role in environmental and corporate performance?

“…One financial measure showing how much debt a company uses to support its business activities is Debt to Equity Ratio (DER) (Arhinful & Radmehr, 2023). In this framework, DER serves as a very important metric, indicating the extent to which a company's financial strategy can impact environmental practices and outcomes.…”

Are market competition, customer concentration and company diversification associated with firm value?

“…High leverage will encourage managers to improve their performance to pay off the company's debt and ultimately gain the trust of creditors and investors (Arhinful & Radmehr, 2023). On the other hand, high leverage results in companies manipulating financial reports not to violate credit agreements, resulting in low-profit quality (Purnamasari & Fachrurrozie, 2020).…”

Portfolio Sorting by Leverage Ratio and Validation in American Stock Market

“…Besides, the monthly excess return rate of the two strategies and S&P 500 are almost the same, but investors may gain the highest accumulative excess return if they keep on investing on longshort strategy from the beginning of the research period [15][16][17][18][19]..…”