An empirical analysis of financial leverage and financial performance: Empirical evidence from Indian listed firms
-
DOIhttp://dx.doi.org/10.21511/imfi.18(2).2021.26
-
Article InfoVolume 18 2021, Issue #2, pp. 322-334
- Cited by
- 1274 Views
-
1271 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The purpose of this paper is to examine the determinants of financial performance, firm liquidity and financial leverage of Indian listed firms. This study uses both static models (pooled, fixed, and random effects) and Generalized Moment Methods (GMM). Financial leverage (FINLE) is defined by the ratio of total liabilities to total assets, whereas the current ratio and the quick ratio are used as firm liquidity factors. Further, a set of financial performance determinants such as return on assets, profit after tax, return on capital employed, return on equity, and Tobin-Q are used as independent factors. The results indicated that profit after tax, return on equity, return on capital employed, and Tobin-Q are the most significant financial success variables that influence financial leverage of Indian listed companies. Furthermore, profit after tax, return on capital invested, return on equity, and Tobin-Q are considered to have a substantial effect on financial leverage among the financial success indicators. In the case of firm liquidity, the findings show that the current ratio and the quick ratio have a substantial effect on the financial leverage of Indian listed companies.
- Keywords
-
JEL Classification (Paper profile tab)C23, C26, G32
-
References50
-
Tables7
-
Figures1
-
- Figure 1. Financial performance and firm liquidity
-
- Table 1. Empirical studies of capital structure in different countries
- Table 2. Measuring variables of the current review
- Table 3. Descriptive statistics
- Table 4. Correlation matrix
- Table 5. Regression analysis
- Table 6. GMM estimation model
- Table 7. Comparison of OLS and robust regression results
-
- Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. Journal of Risk Finance, 6(5), 438-445.
- Al-Homaidi, E. A., Tabash, M. I., & Ahmad, A. (2020a). The profitability of islamic banks and voluntary disclosure: empirical insights from Yemen. Cogent Economics and Finance, 8(1), 1-22.
- Al-Homaidi, E. A., Tabash, M. I., Allamy, K. K., & Ahmad, A. (2020b). The extent of voluntary disclosure in the annual reports of Islamic banks: empirical evidence from Yemen. Banks and Bank Systems, 15(1), 167-184.
- Arellano, & Olympia Bover. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
- Bajaj, Y., Kashiramka, S., & Singh, S. (2019). Capital structure dynamics: China and India (Chindia) perspective. European Business Review, 32(5), 845-868.
- Bose, S., Saha, A., Zaman, H., & Islam, S. (2017). Non-financial disclosure and market-based firm performance: The initiation of financial inclusion Sudipta. Journal of Contemporary Accounting & Economics, 13(3), 263-281.
- Chakrabarti, An., & Chakrabarti, Ah. (2019). The capital structure puzzle - evidence from Indian energy sector. International Journal of Energy Sector Management, 13(1), 2-23.
- Chakraborty, I. (2010). Capital structure in an emerging stock market: The case of India. Research in International Business and Finance, 24(3), 295-314.
- Chen, S., Chen, M., & Wei, H. (2017). Financial performance of Chinese airlines: Does state ownership? Journal of Hospitality and Tourism Management, 33, 1-10.
- Chowdhury, M. A. F., & Rasid, M. E. S. M. (2017). Determinants of performance of Islamic banks in GCC countries: Dynamic GMM approach. In D. S. Mutum, M. M. Butt, & M. Rashid (Eds.), Advances in Islamic Finance, Marketing, and Management (pp. 49-80).
- Darayseh, M., & Chazi, A. (2018). Bank specifics, economics environment, and agency theory: Determinants of banking performance in GCC. The Journal of Developing Areas, 52(4), 199-212.
- Dawar, V. (1984). Agency theory, capital structure and firm performance: some Indian evidence. Managerial Finance, 40(12), 1190-1206.
- Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(4), 387-405.
- Deitiana, T., & Habibuw, L. G. (2015). Factors Affecting the financial performance of property Andreal estate companies listed at Indonesia stock exchange. Asian Business Review, 5(11), 2304-2613.
- Dinh, H. T., & Pham, C. D. (2020). The effect of capital structure on financial performance of Vietnamese listing pharmaceutical enterprises. Journal of Asian Finance, Economics and Business, 7(9), 329-340.
- Ebaid, I. E.-S. (2009). The impact of capital-structure choice on firm performance: empirical evidence from Egypt. The Journal of Risk Finance, 10(5), 477-487.
- Edi, N., & Binti, A. (2010). Working capital management: the effect of market valuation and profitability in Malaysia. International Journal of Business and Management, 5(11), 140-147.
- Elgattani, T. & Hussainey, K. (2020). The determinants of AAOIFI governance disclosure in Islamic banks. Journal of Financial Reporting and Accounting, 18(1), 1-18.
- Farhan, N. H., Alhomidi, E., Almaqtari, F. A., & Tabash, M. I. (2019). Does corporate governance moderate the relationship between liquidity ratios and financial performance? evidence from Indian pharmaceutical companies. Academic Journal of Interdisciplinary Studies, 8(3), 144-144.
- Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
- Güner, A. (2016). The determinants of capital structure decisions: New evidence from Turkish Companies. Procedia Economics and Finance, 38, 84-89.
- Gupta, N. K., & Gupta, H. (2014). Impact of capital structure on financial performance in Indian construction companies. International Journal of Economics, Commerce and Management, II(5), 1-14.
- Hammes, K. (1998). Various aspects of capital structure in Poland (Working Paper). Tallin: Tallin Technical University.
- Handoo, A., & Sharma, K. (2014). A study on determinants of capital structure in India. IIMB Management Review, 26(3), 170-182.
- Harris, M., & Raviv, A. (1991). The theory of the capital structure. The Journal of Finance, 46(1), 297-355.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
- Le, T. P. V., & Phan, T. B. N. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business and Finance, 42, 710-726.
- Li, L., & Islam, S. Z. (2019). Firm and industry specific determinants of capital structure: Evidence from the Australian market. International Review of Economics and Finance, 59, 425-437.
- Majumdar, S., & Chhibber, P. (1999). Capital structure and performance: evidence from a transition economy on an aspect of corporate governance. Public Choice, 98(3-4), 287-305.
- Mak, Y. T., & Kusnadi, Y. (2005). Size really matters: Further evidence on the negative relationship between board size and firm value. Pacific-Basin Finance Journal, 13(3), 301-318.
- Mandiefe, S. P. (2016). How working capital affects the profitability of commercial banks: Case of Afriland Cameroon. Arabian Journal of Business and Management Review, 6(46), 1-9.
- Mardones, J. G., & Cuneo, G. R. (2020). Capital structure and performance in Latin American companies. Economic Research-Ekonomska Istraživanja, 33(1), 2171-2188.
- Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297.
- Nguyen, T. H., & Nguyen, H. A. (2020). Capital structure and firm performance of non-financial listed companies: Cross-sector empirical evidences from Vietnam. Accounting Homepage, 6, 137-150.
- Ooi, J. (1999). The determinants of capital structure evidence on UK property companies. Journal of Property Investment & Finance, 17(5), 464-480.
- Pandey, I. (2007). Financial management (9th ed.). New Delhi: Vikas Publishing House Ltd.
- Rajan, R. G., & Zingales, L. (1995). What Do We Know about Capital Structure? Some Evidence from International Data. The Journal of Finance, 50(5), 1421-1460.
- Rani, D. M. S., & Zergaw, L. N. (2017). Bank specific, industry specific and macroeconomic determinants of bank profitability in Ethiopia. International Journal of Advanced Research in Management and Social Sciences, 6(3), 74-96.
- Salim, M., & Yadav, R. (2012a). Capital structure and firm performance: evidence from Malaysian listed companies. Procedia – Social and Behavioral Sciences, 65, 156-166.
- Saona, P. (2016). Intra- and extra-bank determinants of Latin American Banks’ profitability. International Review of Economics and Finance, 45, 197-214.
- Sayeed, M. A. (2011). The determinants of capital structure for selected Bangladeshi listed companies. International Review of Business Research Papers, 7(2), 21-36.
- Senan, N. A. M., Anagreh, S., Al-Dalaien, B. O. A., Almugari, F., Khaled, A. S., & Al-Homaidi, E. A. (2021a). Working capital management and banks’ performance: evidence from India. The Journal of Asian Finance, Economics and Business, 8(6), 747-758.
- Senan, N. A. M., Noaman, A. A. A., Al-dalaien, B. O. A., & Al-Homaidi, E. A. (2021b). Corporate social responsibility disclosure and profitability: Evidence from Islamic banks working in Yemen. Banks and Bank Systems, 16(2), 91-102.
- Serghiescu, L., & Văidean, V.-L. (2014). Determinant factors of the capital structure of a firm- an empirical analysis. Procedia Economics and Finance, 15, 1447-1457.
- Singh, A., & Sharma, A. K. (2016). An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks. Future Business Journal, 2(1), 40-53.
- Thippayana, P. (2014). Determinants of capital structure in Thailand. Procedia – Social and Behavioral Sciences, 143, 1074-1077.
- Tripathy, S., & Rahman, A. (2020). Leverage and firm performance: Empirical evidence from Indian food processing industry. Management Science Letters, 10, 1233-1240.
- Ullah, A., Pinglu, C., Ullah, S., Zaman, M., & Hashmi, S. (2020). The nexus between capital structure, firm-specific factors, macroeconomic factors and financial performance in the textile sector of Pakistan. Heliyon, 6(8), e04741.
- Vătavu, S. (2015). The impact of capital structure on financial performance in Romanian listed companies. Procedia Economics and Finance, 32, 1314-1322.
- Zheng, C., Sarker, N., & Nahar, S. (2018). Factors affecting bank credit risk: An empirical insight. Journal of Applied Finance & Banking, 8(2), 45-67.