Impact of Financial Leverage on Firm Performance: A Panel Data Study

Nahin Israt Shamsi and Tasrin Farjana

The main motives of this research are to measure the impact of financial leverage (total debt, long-term debt and short-term debt) on firm performance and to assess whether firm size affects the leverage –performance relationship and how this relationship is varied from industry to industry. This study is conducted using a panel data on 24 non-financial companies of CSE50 index, listed in Chittagong Stock Exchange over the duration of 2005 to 2014. The authors have used proxy of Return on Asset, Return on Sales and Net profit margin to measure firm performance and Debt to Asset, Long-term debt to Asset and Short-term debt to Asset to measure financial leverage. Some other control variables (e.g. Size, age, tangibility, GDP growth rate, dummy variable etc.) which are expected to have major influence on firm’s performance have also been considered by the authors. Fixed effect method is used to conduct various estimations of this study. Empirical results of this paper reveal that financial leverage has significant (at 10% significance level) negative impact on firm’s performance, this result is consistent in case of both short-term and long-term leverage and in case of manufacturing firms, this impact is significant but it is insignificant for service oriented firms.

DOI : https://doi.org/10.21102/graf.2017.09.82.05