Effect of financial leverage on shareholder’s returns in a dynamic business environment

2020 ◽  
Vol 4 (2) ◽  
pp. 40-49
Author(s):  
Lateef Oyinloye ◽  
Temitayo O. Olaniyan ◽  
Bamidele O. Agbadua
Keyword(s):  
Risk Premium ◽  
Order Theory ◽  
Business Environment ◽  
Negative Influence ◽  
Annual Reports ◽  
Insurance Companies ◽  
Financial Leverage ◽  
Pecking Order Theory ◽  
Leverage Ratio ◽  
Negative Effect

Modigliani and Miller’s (1963) paper made revelations on the importance of leverage in reducing tax payment obligations. Shareholders’ return may affect the risk premium associated with the use of leverage. However, the literature on leverage and shareholder returns relationships for a dynamic business environment such as Nigeria is still growing. The one-step differenced generalised method of moments (GMM) estimator is used in analysing an unbalanced panel data of 18 insurance firms for the period 2008-2017. The data used are gleaned from the annual reports of the sampled insurance companies. Results showed that the debt ratio has a significant negative effect on shareholders’ returns. However, the results become positive and significant when debt-equity and interest coverage ratios are used as the leverage ratio. This study supports the pecking order theory. It concluded that the effect of financial leverage on shareholders’ returns depends largely on the decomposition of financial leverage; hence both theories examined are relevant. This study recommended, among other things, that there is a need for the management of insurance companies to reassess the costs and risks associated with financial leverage when financing decisions have to be made. Furthermore, high indebtedness should be trimmed to reduce its negative influence on shareholders’ returns by ensuring an appropriate finance option, which will be in accordance to maximise shareholders’ wealth.

scholarly journals Determinants of Capital Structure in Pakistani Listed Firms (The Case of Pakistani Listed Firms)

2021 ◽  
Vol 6 (3) ◽  
Author(s):  
Khan S ◽  
◽  
Ullah S ◽  
ur Rehman I ◽  
Sami I ◽  
...  
Keyword(s):  
Stock Exchange ◽  
Order Theory ◽  
Insurance Companies ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Leverage Ratio ◽  
Listed Firms ◽  
Financial Firms ◽  
Investment Companies ◽  
Size Growth

The sample data was comprised of non-financial firms listed on Karachi Stock Exchange, Pakistan from 1993 to 2002 excluding banks, insurance companies, and investment companies. We were taken the debt to total assets ratio as a proxy for leverage (dependent variable) that was measured following ways mentioned in previous studies (Jensen (1986), Harris and Revive (1990) and Banerjee, et al., 2000). For potential determinants of leverage, we study four independent variables namely tangibility, size, growth and profitability. Variables affecting leverage ratio were calculated by dividing the total debt by total assets and 3-variables were significantly related to leverage ratio whereas the remaining variables were not statistically significant in having relationship with the debt ratio. Our results showed that tangibility variable confirms tradeoff theory, Growth (GT) variable confirms the agency theory hypothesis and Profitability (PF) confirms the predictions of pecking order theory.

scholarly journals What drives the capital structure? The case of non-life insurance companies in Serbia

Industrija ◽  
2021 ◽  
Vol 49 (1) ◽  
pp. 25-41
Author(s):  
Miloš Božović ◽  
Marija Koprivica
Keyword(s):  
Capital Structure ◽  
Fixed Effects ◽  
Order Theory ◽  
Negative Influence ◽  
Positive Influence ◽  
Insurance Companies ◽  
Fixed Effects Model ◽  
Firm Level ◽  
Pecking Order Theory ◽  
The Capital Structure

This paper studies the factors behind the capital structure of insurance companies. We used financial reports of non-life and composite insurance companies in Serbia between 2006 and 2019. In particular, we apply a panel-data approach to examine the relationship between leverage, defined as the ratio of technical reserves to capital and various firm-level characteristics. The coefficients estimated using the individual fixed-effects model indicate a significant and negative influence of profitability, growth and liquidity measures on leverage and a significant and positive influence of company size. The results indicate that the tradeoff theory and the pecking order theory are relevant in explaining the non-life insurer capital structure in Serbia.

scholarly journals Determinants of Capital Structure in the Construction Companies across Europe and Central Asia Region

2020 ◽  
Author(s):  
Hakan Bal
Keyword(s):  
Capital Structure ◽  
Central Asia ◽  
Fixed Ratio ◽  
Order Theory ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Dummy Variables ◽  
Construction Companies ◽  
Negative Effect ◽  
Central Asia Region

This study examines the effects of asset tangibility, profitability, size and liquidity on capital structure (debt leverage) across the construction companies operating in in Europe and Central Asia region using the data between 1993 and 2019. The study documents that the capital structure and other financial ratios under study differ across countries, even in the same industry. Book leverage is found to be significantly negatively related to asset tangibility, profitability and liquidity in accordance with pecking order theory. In particular, fixed ratio has a negative effect on debt ratio in Russia and Romania, but no effect in other countries under study. The effect of size disappears when time dummy variables are introduced.

scholarly journals PENGARUH STRUKTUR KEPEMILIKAN TERHADAP NILAI PERUSAHAAN DENGAN EFISIENSI STRUKTUR MODAL SEBAGAI VARIABEL MEDIASI

AJAR ◽  
2021 ◽  
Vol 4 (02) ◽  
pp. 87-109
Author(s):  
Felicia Wuisan ◽  
Excel Limbunan ◽  
Oktavianus Pasoloran ◽  
Cherly Thanamal
Keyword(s):  
Capital Structure ◽  
Ownership Structure ◽  
Firm Value ◽  
Stock Exchange ◽  
Secondary Data ◽  
Order Theory ◽  
Annual Reports ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Research Period

This study aims to examine the influence of ownership structure on firm value mediated by efficiency capital structure. This research uses pecking order theory, agency theory, and stakeholder theory. The population used in this study are all companies listed on the Indonesia Stock Exchange (IDX) with the research period of 2016-2018. The method of determining the sample using non-random sampling i.e purposive sampling and uses secondary data in the form of annual reports and financial statements of the company. The analytical method used are path analysis and sobel test. The results showed that the efficiency of capital structure can fully mediate the effect of ownership structure on firm value.

scholarly journals Effect of Solvency and Liquidity on The Profitability of Property Companies Listed on The Sharia Stock Index 2018-2020

2022 ◽  
Vol 5 (2) ◽  
Author(s):  
Wibowo Isa ◽  
Mei Candra Mahardika
Keyword(s):  
Order Theory ◽  
Least Square ◽  
Stock Index ◽  
Pecking Order ◽  
Current Ratio ◽  
Pecking Order Theory ◽  
Ordinary Least Square ◽  
Common Effect ◽  
Property Companies ◽  
Negative Effect

<p><em>This study analyzes the effect of Solvency and Liquidity on the profitability of property companies listed on the Indonesian Islamic stock index for the 2018-2020 period. This research is quantitative research with secondary data from financial reports from 2018 to 2021. Regression model analysis using Common Effect Model (CE) or Ordinary Least Square (OLS) method. The findings show that DAR has a negative effect on ROA, which explains that debt will burden the company and reduce the profit level of Islamic property companies. On the other hand, DAR has no effect on ROE because debt does not affect the value of equity owned by the company itself. DER has no effect on ROA and ROE, this is certainly contrary to the Pecking Order Theory. Current Ratio has a negative effect on ROA, this is not in accordance with </em><em>Pecking Order Theory</em><em>. Cash ratio has a positive effect on ROA and also on ROE, and is in accordance with </em><em>Pecking Order Theory</em><em>. The cash ratio as the company's ability to pay short term has a positive influence, because the company is not limited to being responsible for the environment around the company but also socially responsible to the community.</em></p><p> </p><p>Penelitian ini menganalisis pengaruh Solvabilitas dan Likuiditas terhadap profitabilitas perusahaan properti yang terdaftar di indeks saham syariah Indonesia periode 2018-2020. Penelitian ini menggunakan pendekatan kuantitatif dengan data sekunder dari laporan keuangan tahun 2018 sampai dengan tahun 2021. Analisis model regresi menggunakan metode Common Effect Model (CE) atau Ordinary Least Square (OLS). Hasil analisis menunjukkan bahwa DAR berpengaruh negatif terhadap ROA,  yang menjelaskan bahwa utang akan membebani perusahaan dan mengurangi tingkat keuntungan perusahaan properti syariah. Di sisi lain, DAR tidak berpengaruh terhadap ROE karena hutang tidak mempengaruhi nilai ekuitas yang dimiliki oleh perusahaan itu sendiri. DER tidak berpengaruh terhadap ROA dan ROE, hal ini tentunya bertentangan dengan Pecking Order Theory. Besarnya ekuitas utang secara khusus tidak berdampak pada tingkat keuntungan perusahaan properti. Current Ratio berpengaruh negatif terhadap ROA, hal ini tidak sesuai dengan Stakeholder Theory. Kondisi ini menyebabkan Current Ratio berpengaruh negatif terhadap ROE. Cash ratio berpengaruh positif terhadap ROA, dimana Cash Ratio berpengaruh positif terhadap ROE, dan sesuai dengan Stakeholder Theory. Rasio kas sebagai kemampuan perusahaan untuk membayar jangka pendek memiliki pengaruh positif, karena perusahaan tidak sebatas bertanggung jawab terhadap lingkungan sekitar perusahaan tetapi juga bertanggung jawab secara sosial kepada masyarakat.</p><p><em> </em><em></em></p><br /><p class="MsoNormal" style="text-align: justify; border: none; mso-padding-alt: 31.0pt 31.0pt 31.0pt 31.0pt; mso-border-shadow: yes;"><input id="ext" type="hidden" value="1" /><input id="ext" type="hidden" value="1" /></p>

scholarly journals Investigating the Impact of Firm Characteristics on Capital Structure of Quoted and Unquoted SMEs

2017 ◽  
Vol 7 (1) ◽  
pp. 144
Author(s):  
Mostafa S. ELbekpashy ◽  
Khairy ELgiziry
Keyword(s):  
Capital Structure ◽  
Control Variable ◽  
Order Theory ◽  
Explanatory Models ◽  
Short Term ◽  
Pecking Order Theory ◽  
Leverage Ratio ◽  
Two Samples ◽  
The Impact ◽  
The Capital Structure

This study aims to enhance the understanding of SMEs’ capital structure in Egypt. The study tests the impact of asset structure, size, profitability, liquidity, growth, age, and ownership structure as independent variables on the leverage ratio. Three alternative variables are used as a proxy for leverage: total, long term, and short term leverage. The study further investigates the significance of the relationship between the economic sector as a control variable and the three leverage ratios. Multiple regression analysis is used to develop the explanatory models for two samples of SMEs. The first sample comprises of 28 firms, which represent all listed and traded SMEs in Egypt as of 31/12/2016, covering the period from 2008 till 2015. The second sample includes panel data of 95 non-quoted SMEs. The overall model recommends that all the independent and control variables are significantly explaining the capital structure decisions of SMEs in Egypt.  The results of the two samples show a high degree of similarities. The managerial ownership is found to be negatively correlated to short term leverage, while the block holding ownership is positively correlated to the total and the short term leverage. Moreover, the sector shows a significant relationship with the capital structure. The results of the study demonstrate that the best explanation of the SMEs behavior in Egypt is the pecking order theory. Finally, the study introduces useful recommendations for policy makers and SMEs’ management in Egypt.

scholarly journals PENGARUH INTELLECTUAL CAPITAL TERHADAP KINERJA PERUSAHAAN ASURANSI DI INDONESIA

2017 ◽  
Vol 21 (3) ◽  
pp. 491
Author(s):  
Henny Setyo Lestari
Keyword(s):  
Human Capital ◽  
Firm Size ◽  
Intellectual Capital ◽  
Value Added ◽  
Insurance Companies ◽  
Company Performance ◽  
Financial Leverage ◽  
Return On Assets ◽  
Structural Capital ◽  
Negative Effect

The purpose of this paper is to analyze the role of intellectual capital (IC) and its relationship with financial performance of Indonesian Insurance during the period 2003-2012. In total, 11 insurance companies were selected as the sample. Regression model (partial least squares) has been applied to examine the relationship between IC and companies return on assets ratio (ROA). The results of the research revealed that Value added capital coefficient (VACA) have a significantly negative effect and value added human capital (VAHU) has a positive significant effect on the performance of the company (ROA), while the value added of structural capital (SCVA), firm size and financial leverage does not have a significant effect on company performance (ROA). Value added human capital (VAHU) and financial leverage has a positive significant effect on the performance of the company (ROE), while the Value Added Capital Coefficient (VACA), Value Added Structural Capital (SCVA) and firm size has no significant effect on company performance (ROE).

scholarly journals THE DEBT-EQUITY CHOICE OF JAPANESE FIRMS

2017 ◽  
Vol 17 (2) ◽  
Author(s):  
Terence Tai-Leung Chong ◽  
Daniel Tak-Yan Law ◽  
Feng Yao
Keyword(s):  
Capital Market ◽  
Market Timing ◽  
Order Theory ◽  
Asian Financial Crisis ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Leverage Ratio ◽  
Japanese Firms ◽  
Timing Effect ◽  
Tangible Assets

Prior studies on the debt-equity choice of firms focus on capital market oriented economies. This paper examines whether firms in Japan, the world’s largest bank-oriented economy, adjust their debt-equity choice towards the target. We find that the leverage ratios of Japanese firms do adjust slowly towards their target levels. The adjustment speed has dwindled after the Asian Financial Crisis. In contrast to existing literature, we show that an increase in tangible assets reduces the leverage ratio of firms in Japan. It is also found that the effect of financial deficit is persistent while the market timing effect is not.Keywords: Debt-equity Choice; Pecking Order Theory; Market Timing Theory; Trade-Off Theory.

scholarly journals The impact of financial leverage on firm performance: evidence from Russia. 

2015 ◽  
Vol 9 (2) ◽  
pp. 24-36
Author(s):  
Евгений Валерьевич Илюхин
Keyword(s):  
Firm Performance ◽  
Interest Rates ◽  
High Growth ◽  
Order Theory ◽  
Agency Cost ◽  
Free Cash Flow ◽  
Growth Potential ◽  
Financial Leverage ◽  
Pecking Order Theory ◽  
The Impact

Евгений Валерьевич Илюхин - Кафедра Экономика, Управление и Информатика, Институт Авиационных Технологий и Управления Ульяновского Государственного Технического Университета. Электронная почта: [email protected] The relationship between financial leverage and firm performance is studied in this paper. Financial leverage can positively influence firm performance because leverage can be treated as a tool for disciplining management. As such a positive relationship between financial leverage and firm performance is expected based on the agency cost theory. However it is not always applicable to the firms with too high portion of debt. It is because high indebtedness may lead to significant financial limitations and that influences firm performance negatively. A ratio of firm debt to total assets is used as financial leverage measure while return on assets, return on equity and operating margin are employed as firm performance measures. The results for a large sample of Russian joint-stock companies over the period 2004-2013 years show that the impact of financial leverage on Russian firms’ performance has been negative. It can be explained by ineffective corporate control of Russian market, debt attracting difficulties, high growth potential and high interest rates for financing through debt.  The findings are robust to using different measures of firm performance, checking sub-samples and time clusters and employing alternative estimation approach. The results thus support pecking-order theory but are not consistent with trade-off or free-cash-flow theories.

scholarly journals Effect of Corporate Financial Leverage on Financial Performance: A Study on Publicly Traded Manufacturing Companies in Bangladesh

2018 ◽  
Vol 14 (12) ◽  
pp. 124 ◽  
Author(s):  
Ripon Kumar Dey ◽  
Syed Zabid Hossain ◽  
Rashidah Abdul Rahman
Keyword(s):  
Financial Performance ◽  
Empirical Studies ◽  
Order Theory ◽  
Manufacturing Companies ◽  
Financial Leverage ◽  
Publicly Traded ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Debt Capital ◽  
Equity Ratio

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&rsquo;s Q, and financial leverage is measured using the debt-assets ratio and debt-equity ratio. It is observed that ROA and Tobin&rsquo;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 reliability of accounting information.

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