TY - GEN
T1 - Financial Leverage Hits Corporate Performance
AU - Ahmad, Muhammad Ishfaq
AU - Guohui, Wang
AU - Hasan, Mudassar
AU - Rafiq, Muhammad Yasir
AU - Rehman, Ramiz Ur
PY - 2017/6/8
Y1 - 2017/6/8
N2 - 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.
AB - 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.
KW - Asset and capital
KW - Capital structure
KW - Financial performance
UR - http://www.scopus.com/inward/record.url?scp=85125621232&partnerID=8YFLogxK
U2 - 10.1007/978-3-319-48454-9_10
DO - 10.1007/978-3-319-48454-9_10
M3 - Conference contribution
AN - SCOPUS:85125621232
SN - 9783319484532
T3 - Springer Proceedings in Business and Economics
SP - 125
EP - 138
BT - Advances in Applied Economic Research - Proceedings of the 2016 International Conference on Applied Economics ICOAE
A2 - Tsounis, Nicholas
A2 - Vlachvei, Aspasia
PB - Springer
CY - Cham, Switzerland
T2 - International Conference on Applied Economics, ICOAE 2016
Y2 - 7 July 2016 through 9 July 2016
ER -
