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Advances in Applied Economic Research pp 125–138Cite as

Financial Leverage Hits Corporate Performance

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Abstract

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.

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Author information

Authors and Affiliations

  1. College of Science, Liaoning Technical University, Fuxin, Liaoning, China

    Muhammad Ishfaq Ahmad

  2. Liaoning Technical University, Fuxin, China

    Wang Guohui & Muhammad Yasir Rafiq

  3. Lahore Business School, The University of Lahore, Lahore, Pakistan

    Mudassar Hasan & Ramiz-Ur Rehman

Authors
  1. Muhammad Ishfaq Ahmad
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  2. Wang Guohui
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  3. Mudassar Hasan
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  4. Muhammad Yasir Rafiq
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  5. Ramiz-Ur Rehman
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Corresponding author

Correspondence to Muhammad Ishfaq Ahmad .

Editor information

Editors and Affiliations

  1. Department of International Trade, Western Macedonia University of Applied Sciences, Kastoria, Greece

    Nicholas Tsounis

  2. Department of International Trade, Western Macedonia University of Applied Sciences, Kastoria, Greece

    Aspasia Vlachvei

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Ahmad, M.I., Guohui, W., Hasan, M., Rafiq, M.Y., Rehman, RU. (2017). Financial Leverage Hits Corporate Performance. In: Tsounis, N., Vlachvei, A. (eds) Advances in Applied Economic Research. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-48454-9_10

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