Determinants of Firm’s Leverage and Theoretical Examination: A Study on the Food and Allied Companies in Bangladesh

Abstract

Leverage helps to understand how much debt and equity employed by a firm to funds its operation and asset. Modigliani and Miller are the path breaker in this sector. In 1958 identified irrelevancy proposition of Firm Leverage decision. In 1963 they came with their new explanation to incorporate the effect of tax. There are some other popular theories. Jensen and Meckling agency cost theory, Scott trade off theory, Ross signaling theory, Myers and Majluf pecking order theory are the most popular one. There are several determinants in Firm Leverage used in different studies. In this study, we used some most popular determinants. They are profitability, tangibility, growth, operating leverage, liquidity, size. In this study, nine DSE listed food and allied companies’ data are used to analysis the relation between determinants and leverage and Firm Leverage theories are also tested for those companies. Food and allied sector is a constant growing sector and good option for the investors. Nine A category companies’ data are used for this study. For the data analysis descriptive data, hypothesis, correlation and regression method is used. Leverage mean of last seven-year data is 48.5%. That means there is a good combination of debt and equity. In the hypothesis, T-test: paired two sample for means is used. Null hypothesis only accepted for the tangibility determinants. That indicates there is a relationship between tangibility and leverage. In correlation matrix, it also showed that, leverage and tangibility have the strongest relation and the relation is negative. In regression model, only tangibility result is significant and the coefficient is negative. According to the result, pecking order theory, trade off theory and signaling theory play an important role in food and allied companies in Bangladesh. The analysis showed that, companies with high tangibility ratio try to finance their operations by internal finance rather than debt finance and supported theories also refer the same result.