Financial Leverage Research Articles

Analysing the Impact of Capital Structure on Firm Value: A Study in Corporate Finance

Abstract: This study investigates the relationship between capital structure and firm value across various industries. Using a cross-sectional quantitative analysis, the research examines how different levels of debt, equity, and financial leverage affect firm value, measured by market capitalization and Tobin's Q. The findings suggest that firms with moderate debt levels experience enhanced firm value, benefiting from the tax shields provided by debt without incurring significant financial distress. However, excessive financial leverage negatively impacts firm value, as firms face increased risk of financial instability. The study supports key theories such as the trade-off theory and pecking order theory, demonstrating that capital structure decisions are influenced by factors such as firm size, profitability, and industry characteristics. The implications for corporate managers and investors include optimizing debt-equity balance to maximize firm value while managing financial risk. Future research should focus on industry-specific dynamics and longitudinal analyses to further explore these relationships.

The relationship between financial performance, firm size, leverage, and corporate social responsibility: A case study of Accenture Plc

This study examined the relationship between financial performance, firm size, leverage, and Corporate Social Responsibility (CSR) at Accenture Plc. Using a quantitative correlational research design, the research utilized secondary data from Bloomberg (2014-2023) and analyzed the variables through a multiple regression model. Financial performance (measured by Return on Equity), firm size (total revenue), and leverage (debt-to-assets ratio) were the independent variables, while CSR was measured through Environmental, Social, and Governance (ESG) scores. Findings revealed that firm size had a significant positive relationship with CSR, suggesting that larger firms are more likely to engage in CSR activities. However, there was no statistically significant relationship between Return on Equity (ROE) and leverage with CSR scores. These findings aligned with previous research on the impact of firm size on CSR but differed in terms of ROE and leverage's influence on CSR engagement. The study concluded that Accenture's revenue capacity positively influenced its CSR activities, while leverage and financial performance, as measured by ROE, did not have a significant impact. Recommendations were made for policymakers to consider encouraging larger firms to enhance CSR engagement through fiscal incentives.

The role of accounting conservatism in corporate innovation

AbstractWe provide evidence to determine whether conservative financial reporting is associated with firm‐level investments in innovation in China. We find that firms adopting a more conservative reporting policy invest substantially more in innovative projects. We also find that conservative reporting practices improve the association between executives' pay‐for‐performance and a firm's innovation efforts. The association between conservatism and firm‐level innovation is concentrated in firms that are in the non‐high‐tech industries, that have higher financial leverage and more product market competition. Our paper adds to public policy by providing evidence of the beneficial influence of accounting conservatism on higher innovation investment.

Capital Structure and Enterprise Market Value: An Empirical Analysis Based on S&P 500 Companies

Abstract: This study explores the impact of capital structure on enterprise market value, specifically examining the influence of the debt ratio on the market valuation of S&P 500 companies. Capital structure decisions are crucial for corporate managers and investors, as they significantly affect firm performance, risk, and market perception. The research is motivated by the need to understand how financial leverage influences market valuation, particularly in large, publicly traded companies. Utilizing two-way fixed effect panel data models spanning from 2020 to 2023, we find significant evidence that higher leverage is associated with an increase in market valuation, offering a comprehensive view of the factors that influence corporate market values. Additionally, the study reveals that the impact of leverage varies across company sizes and examines sector-specific effects and the role of long-term debt. The findings provide key insights for investors and corporate managers regarding the impact of financial structure on company valuation, emphasizing the importance of optimizing capital structure to enhance firm value and strategic decision-making.

The Impact of Financial Ratios on the Financial Health of Companies Listed on the Stock Exchange

Organizational stability, insolvency, financial hardship, and accounting data quality are all connected to a company's financial health. Examining the financial health of companies is important from various aspects, especially in light of globalization and the expansion of communications. There are multiple methods to assess the financial health of companies and predict financial bankruptcy, among which statistical techniques are prominent. This study investigates the financial ratios impacting the Logit model-based financial stability of businesses listed on stock exchanges. The members of the statistical sample include 152 businesses that are listed on the Tehran Stock Exchange since 2011 to 2021. To test the hypotheses, regression analysis and Logit and Probit models were employed using EViews software. The results indicated that profitability and agency costs have a significant impact on the financial health of companies. However, financial leverage, current ratio, cash holding level, and working capital to total assets did not significantly affect the financial health of the companies.

The Impact of Cash Liquidity and Financial Leverage on The Performance of Iraqi Banks: A Comparative Study Between Islamic and Conventional Banks

Degree of financial leverage refers to the percentage of bank assets financed through debt, which banks must employ to achieve returns and cover costs, as well as the availability of cash at maturity. Therefore, the problem of the study arises in how the indicators of leverage and cash liquidity affect the indicators of financial performance in the Iraqi banking sector. That is why the study aims to use econometrics to demonstrate the impact of leverage and cash liquidity on the financial performance indicators represented by return on assets (ROA) and net profit margin (NPM) for a sample of 38 conventional and Islamic banks for the period 2010-2022. The Dynamic Panel Data methodology was used to determine the relationship between variables, which combines time series and cross-sectional, precisely the generalized moment method (GMM). Results show that financial leverage negatively and significantly impacts ROA and NPM indicators in the total sample and Islamic and conventional banks, except for the positive relationship with ROA in conventional banks. The results also showed the positive impact of cash liquidity on ROA and NPM indicators in the total sample and Islamic and conventional banks, except for its negative impact on ROA indicators in conventional banks. The results also showed the negative impact of the cash credit (cash credit to total assets ratio) on ROA and NPM indicators in the total sample and Islamic and conventional banks. Paper type: Research paper

The Role of Leverage in Moderating ESG Disclosure and Financial Slack on the Company's Financial Performance

The purpose of this study is to determine the effect of ESG Disclosure and financial slack on the Company's financial performance by using leverage as a moderating variable. The emergence of issues related to the environment, social, and governance of company operations in Indonesia raises concern and responsibility to the community in the form of sustainability reporting. ESG disclosure provides a more complete picture of the sustainability aspects of company performance that supports regulatory reporting in Indonesia which provides an overview of how the company performs financially in a certain period. This research uses a quantitative approach with an explanatory method. The sample of this study is a mining company listed on the IDX for the period 2020-2022. The sampling method used was purposive sampling, with a total sample size of 50 companies and a total observation data of 150. Data analysis using moderated regression analysis (MRA). The results showed that the financial slack variable had a significant effect on the company's financial performance and leverage was able to negatively moderate the influence of the financial slack variable on the company's financial performance. In contrast, ESG disclosure had no significant effect on the company's financial performance and leverage was unable to moderate the influence of the ESG disclosure variable on the company's financial performance.

Exploring drivers and factors of benefit impact reports quality: Retracing a stakeholder theory approach

AbstractIn the pursuit of global sustainability, firms play an increasingly pivotal role. In this scenario, Benefit Corporations aim to seamlessly integrate profit‐making endeavors with sustainable practices. This corporate model has spread around the world and in Italy; it was adopted through Law No. 208/2015 introducing Italian Benefit Corporations (BCs). Italian BCs must produce a Benefit Impact Report (BIR) alongside their financial statements, as a strategic communication tool for demonstrating the company's commitment to advancing common societal benefits to stakeholders. Leveraging stakeholder theory, this study adopts a mixed methodological approach that incorporates manual content analysis of BIRs from 132 Italian BCs, combined with a regression model exploring the impact of firm characteristics on the quality of BIRs. Findings highlight a positive relationship between firm size, financial leverage, and profitability on the quality of BIRs. This study is the first to explore the quality of BIRs and their determinants, providing academic and practical implications.

Firm characteristics and corporate governance of state-owned enterprises: An analysis of an emerging market

This paper explores the relationship between firm-level factors and the quality of corporate governance of state-owned enterprises (SOEs) in an emerging economy, namely Vietnam. We employ a self-built corporate governance index (CGI) for SOEs and conduct an empirical analysis of data from 113 listed SOEs on the stock market of Vietnam from 2016-2020 using a fixed effect model (FEM) as suggested by the Hausman test. We find that firm-level characteristics such as firm age and tangibility of assets as well as macroeconomic factors such as the quality of the business climate and economic growth exhibit a statistically significant correlation with the corporate governance quality of SOEs. On the other hand, there is no established statistically significant relationship between other firm characteristics such as firm size, state ownership, financial leverage, growth opportunities and corporate governance. These results for an emerging economy like Vietnam are novel and provide implications for policymakers, regulators, shareholders and other stakeholders on the possibility of enhancing the quality of corporate governance of SOEs in an emerging market, a critical issue given the increasing role of SOEs in economies. Our research can be improved for future research in a couple of aspects. First, addressing the case of companies that do not disclose their governance practices in annual reports would help enhance the information for the corporate governance index. Second, extending the data to compare listed SOEs with other listed firms would provide a more comprehensive analysis.

Media pressure, corporate social responsibility, and the risk of share price crash

The investigation employs a compilation of data from 5085 listed entities over the period from 2013 to 2022 to explore the dynamics between media coverage, corporate social responsibility initiatives (CSR), and the risk of stock market crashes. The results suggest that greater media focus can elevate the chances of stock value plummeting, whereas robust CSR dedication tends to mitigate such risks. The extent of overall debt funding plays a significant role as an intermediary in the connection between CSR efforts and the threat of equity market meltdowns. Moreover, the influence of the audit services provided by the Big Four firms greatly alters the correlation between CSR endeavors and the probability of market downturns. Additionally, the influence of CSR on the risk of crashes varies based on the profitability of the company. The study proposes that enhancing CSR execution, maintaining moderate levels of financial leverage, and optimizing approaches to media relations can all contribute to reducing the likelihood of stock market crashes.

Periodic information enhancing and controlling stability of complex corporate financial systems

We explore the mechanism and control behavior of how periodic information affects the stability of complex corporate financial systems from two viewpoints: the corporate life cycle and the stability of financial leverage risk. A complex corporate financial system model with correlated noise and periodic driving is proposed. Furthermore, two stability indicators are proposed to measure the stability of the corporate life cycle and the risk of corporate financial leverage. Stochastic simulation results show that enhancing the intensity and frequency of controllable periodic information can improve system stability. The stability of complex corporate life cycles and financial leverage risks exhibits opposite behaviors in terms of noise correlation. In addition, it is observed that there are specific threshold values of system parameters, and the relationship with the intensity of periodic information shows non-monotonic characteristics, manifesting peculiar phenomena and transition behaviors. Finally, by comparing with actual financial data, the proposed model is verified to be superior to the benchmark model.

The Moderating Effect of Competition on The Leverage-Performance Relation: Evidence from Vietnam

This paper examines the moderating effect of competition on the relationship between financial leverage and firm performance in Vietnam. Using a dataset created out of 352 firms listed on Vietnam’s stock exchanges in 2015–2019, this paper estimates both the leverage-performance relation and the dependence of this nexus on market competition. The two-step system generalised method of moments is used to tackle the endogeneity, unobserved heterogeneity, and autocorrelation problems in our model estimation. The findings reveal a negative leverage-performance nexus, and increased competition hurts this relationship. In highly competitive markets, debts become more expensive, thus leading to increased financial pressures on leveraged firms. The fiercer competition also creates a risky business environment, so leveraged firms may fail when operating inefficiently and failing to satisfy their debt obligations. Given the results, this paper proposes recommendations on using financial leverage to improve firm performance.

The Role of Financial Leverage and Cost Management on Operational Efficiency and Earnings Stability in Hospitality Industry in Indonesia

This study explores the impact of cost management and financial leverage on operational efficiency and earnings stability in the hospitality industry in Indonesia. Utilizing a quantitative approach, data was collected from 280 hospitality businesses and analyzed using Structural Equation Modeling-Partial Least Squares (SEM-PLS). The results reveal that both cost management and financial leverage significantly contribute to earnings stability, with financial leverage also playing a strong role in improving operational efficiency. Operational efficiency serves as a critical mediator, linking financial strategies to stable earnings. The findings highlight the importance of carefully balancing debt financing and cost control to optimize both financial performance and operational processes in the hospitality sector. These insights offer valuable guidance for hospitality managers seeking to enhance long-term profitability and resilience in a highly competitive industry.

The Influence of Financial Performance and Underwriter Reputation on Annual Return

This study examines the effect of profitability, liquidity, financial leverage, and the underwriter's reputation on the underpricing of Initial Public Offering (IPO) shares. Samples were taken from companies that conducted an IPO on the Indonesia Stock Exchange from 2018 to 2021 using a purposive sampling method, resulting in sample data from 62 companies. Data on underpricing were measured using initial return, profitability was measured by return on equity (ROE), liquidity was measured using the current ratio (CR), financial leverage was measured using the debt-to-equity ratio (DER), and underwriter's reputation was measured using the top 10 in terms of the 20 most active brokerage houses monthly in total trading frequency during the study period. The results of this study indicate that profitability (ROE) and underwriter reputation (RU) have a negative and significant effect on underpricing, while liquidity (CR) and financial leverage (DER) have a negative and insignificant effect on underpricing.

Impact of Leverage, Market Share, and Dividend Policy on Firm Value in the Technology Sector

This study investigates the effects of financial leverage, market share, and dividend policy on firm value within the global technology sector. Using data from 120 publicly listed technology companies over the period from 2010 to 2022, a multiple regression analysis is employed to examine how these independent variables influence firm value, as measured by market capitalization. The findings show that financial leverage negatively impacts firm value, as higher debt levels increase financial risk and reduce investor confidence. Market share demonstrates a strong positive effect, with companies holding larger market shares benefiting from economies of scale and competitive advantages, leading to higher valuations. Moreover, dividend policy is found to play a significant role in influencing firm value. Firms with stable and attractive dividend payouts are generally viewed more favorably by investors, which boosts market capitalization. The results suggest that while expanding market share contributes positively to firm value, excessive debt can undermine this advantage. Additionally, maintaining a consistent and attractive dividend policy can further enhance firm value by signaling financial health and stability to investors. This study provides critical insights for technology sector managers and investors, emphasizing the importance of balancing financial strategies, market positioning, and dividend distribution to maximize firm value.

CREDIT MANAGEMENT STRATEGY TO ENSURE THE FINANCIAL STABILITY OF PACKAGING INDUSTRY ENTERPRISES

The article examines the possibilities of increasing the efficiency of credit resource management to ensure the financial stability of enterprises in the packaging industry. It was found that in modern conditions, the study of the assessment of the financial stability of the enterprise was not of a comprehensive nature, but was based, mainly, on the use of the coefficient method, which took place on a static basis and did not take into account the specifics of the industry, did not make it possible to assess the ability of the enterprise to generate cash flows for the implementation of activities. It has been proven that the problem of ensuring financial stability and financial balance of packaging industry enterprises is now an important one, especially in the conditions of uncertainty and instability of the economic environment caused by the war. On the basis of the conducted research, the key factors on which an effective credit management strategy should be based have been determined. In this context, the special importance of a timely and objective assessment of the financial stability of enterprises in the packaging industry, regardless of the forms of their ownership, is emphasized, which should be aimed at finding ways and opportunities to increase profits by means of a timely analysis of the financial state of enterprises. Eleven factors are proposed that should be taken into account when choosing a financial credit institution. A systematic analysis of the financial condition of the enterprise, its solvency, liquidity and financial stability is also necessary because the profitability of any enterprise largely depends on its solvency. Based on the balance sheet plan of the necessary resources, we forecast the sources of their formation, taking into account the level of financial leverage and the funds saved as a result of this at the time of taxation. Choosing the most profitable parameters, the enterprise can immediately determine the directions of saving its own monetary and financial resources, as well as optimize the use of already received ones. It has been established that in modern conditions, the relevance of effective financial management as a system of timely methods and techniques capable of preventing a financial crisis and avoiding risks of loss of financial stability of the enterprise in the future is objectively increasing. The lack of a clear definition of financial stability as an economic category and a system of indicators for its assessment, which requires further theoretical development of the problem.

Capital price distortion, financial leverage, and credit risk in commercial banks

This paper uses panel data from 30 provinces and cities from 2012 to 2022 (excluding Tibet, Hong Kong, Macao, and Taiwan), and empirically examines the impact of capital price distortion and financial leverage on the non-performing loan (NPL) ratio of banks by constructing a dynamic panel system GMM model. The study finds that capital price distortion and financial leverage have a significantly positive impact on the NPL ratio of commercial banks. Increasing the degree of capital price distortion and financial leverage leads to a higher NPL ratio. Further analysis reveals that capital price distortion has a significantly positive impact on financial leverage, while Overcapacity has a significantly negative impact on financial leverage.

Pengaruh Financial Distress, Firm Size, Leverage, dan Ceo Retirement terhadap Prudence (Studi Empiris pada Perusahaan Sektor Makanan dan Minuman yang terdaftar di Bursa Efek Indonesia tahun 2019-2022)

Prudence is a conference of accounting conservatism or which means the principle of prudence in recognizing income or assets and expenses that can result in shrinking the profits generated by a company in order to reduce the risk of uncertainty in the future. This study aims to examine the factors that affect prudence in food and beverage sector companies on the Indonesia Stock Exchange in 2019-2022. The sampling technique used in this study is purposive sampling. A total of 97 companies have met the criteria as an observation unit. The method of analysis used is multiple linear regression analysis. The results provide empirical evidence that financial distress, firm size, leverage, and ceo retirement affect prudence.

Green vs. brown: Climate risk showdown – who’s thriving, who’s diving?

Increasingly complex climate change poses unprecedented risks and challenges. We attempt to analyze the strategic responses of firms in dealing with climate risk and whether green firms outperform brown firms by exploring the relationship between climate risk and firms’ cash flow. To this end, this paper uses the high-dimensional fixed-effects model for empirical analysis based on panel data of Chinese listed firms from Q1 2010 to Q4 2022. We find that firms have the motivation to hold more cash in the face of climate risk, and that brown firms will be more proactive in cash flow management compared to green firms. In addition, there are significant industry and seasonal effects of climate risk on firms’ cash flow. Mechanism tests find that climate risk prompts firms to increase cash flow by forcing them to reduce financial leverage and erode operating costs, as well as by inducing increased media attention to the firm. Heterogeneity analysis shows that the positive effect of climate risk on cash flow is more significant among low digital transformation firms, high financial constraints firms, firms with low managerial myopia, and SOEs. An analysis of the economic consequences shows that climate risk leads firms to be more aggressive in capturing market share, increasing productivity and strengthening ESG performance. The above findings help to enlighten firms on how to manage their risk exposures and adjust their internal governance structures as a way to maintain stable operations in an environment of intensified uncertainty. In brief, this paper highlights the differentiated financial decisions that green and brown firms make in response to climate risk, providing empirical evidence and policy implications for advancing the green transformation of firms.

Determinants and convergence of biodiversity or extinction disclosures of mining firms in Africa

This study probes into the biodiversity disclosure practices of mining firms in Africa, the determinants and the evidence of convergence using information economics analysis. Data was sourced from 21 mining firms covering the period 2006 to 2019 operating in Morocco and South Africa with various mine sites owned in other countries like Ghana. Using a combination of panel-corrected standard errors regression, logistic regression and the test of beta and sigma-convergence, the study found that there is a moderate level of biodiversity disclosure across African mining firms and there is both beta and sigma-convergence. The study found that board size enhances disclosures on all biodiversity indicators, viz, biodiversity disclosure index, 304-1 (proximity of sites to biodiversity hotspots) being the most disclosed, followed by 304-3 (habitats protected or restored), 304-4 (IUCN Red List Species) and 304-2 (impact of activities on biodiversity). Generally, board size drives biodiversity disclosures but board independence does not. Additionally, the membership of the United Nations Global Compact, a multistakeholder initiative significantly affects every disclosure indicator. Financial leverage drives the disclosure of 3 indicators. Other factors like firm size, multinational enterprise status, profitability, cross-listing, human capital development, and gross domestic product were explored. The results of the analyses are relevant for practitioners, policymakers, regulators and academics alike.