Financial Leverage Hits Corporate Performance

Muhammad Ishfaq Ahmad*, Wang Guohui, Mudassar Hasan, Muhammad Yasir Rafiq, Ramiz Ur Rehman

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

1 Citation (Scopus)

Abstract

The study has been conducted to explore the relationship between financial leverage and financial performance. The study also involves macroeconomic perspective by involving few macro variables like interest rate. It has been conducted on the nonfinancial sector of Pakistan including all nonfinancial companies listed at Karachi Stock Exchange (KSE) as a sample. The study has been conducted over a period of 7 years, 2005 through 2011. Regression analysis has been performed in order to analyze the data. The results of the study exhibit that financial leverage, measured by debt to equity ratio, has significant impact on financial performance variables, measured by return on assets (ROA) and return on capital (ROC), whereas on the other two variables, return on equity (ROE) and earnings per share (EPS), its effect is insignificant. On the other hand, two variables, namely, gross domestic product and interest rate, were used as indicators of overall economy, and their impact was also studied on financial performance. The results show that their effect on financial performance is insignificant. Combining all the results together, it can be concluded that financial performance is majorly determined by firm’s choice of financial leverage and not by the overall health of the economy specifically in context of nonfinancial firms in Pakistan. Managers in the search for improved performance apply firm-specific strategies, which they believe will provide their firms with the competitive advantage in the marketplace.

Original languageEnglish
Title of host publicationAdvances in Applied Economic Research - Proceedings of the 2016 International Conference on Applied Economics ICOAE
EditorsNicholas Tsounis, Aspasia Vlachvei
Place of PublicationCham, Switzerland
PublisherSpringer
Pages125-138
Number of pages14
ISBN (Electronic)9783319484549
ISBN (Print)9783319484532
DOIs
Publication statusPublished - 8 Jun 2017
Externally publishedYes
EventInternational Conference on Applied Economics, ICOAE 2016 - Nicosia, Cyprus
Duration: 7 Jul 20169 Jul 2016

Publication series

NameSpringer Proceedings in Business and Economics
ISSN (Print)2198-7246
ISSN (Electronic)2198-7254

Conference

ConferenceInternational Conference on Applied Economics, ICOAE 2016
Country/TerritoryCyprus
CityNicosia
Period7/07/169/07/16

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