Leverage and performance: do size and crisis matter?. Issue 5 (11th November 2020)

• Record Type: Journal Article
• Authors: Danso, Albert; Lartey, Theophilus A.; Gyimah, Daniel; Adu-Ameyaw, Emmanuel
• Is Part Of: Managerial finance. Volume 47:Issue 5(2021)
• Page Start: 635
• Page End: 655
• Publication Date: 2020-11-11
• Subjects: Leverage -- Firm performance -- Financial crisis -- India; G01 -- G30 -- G31 -- G32; Corporations -- Finance -- Periodicals; Business enterprises -- Finance -- Periodicals; 658.1505
• DOI: 10.1108/MF-10-2019-0522
• Languages: English
• ISSNs: 0307-4358

Abstract

Abstract : Purpose: This paper contributes to the capital structure literature by examining the impact of financial leverage on firm performance and also the extent to which firm size and crisis matter in the leverage -performance relationship. Design/methodology/approach: Using data from 2403 Indian firms during the period 1995–2014, generating a total of 19, 544 firm-year observations, panel econometric methods are employed to test the leverage-performance relationship. Findings: Drawing insights from agency theory and using Tobin's Q (TQ) as our main measure of performance, the authors uncover that financial leverage is negatively and significantly related to firm performance. The authors also observe that the impact of financial leverage on firm performance is lower for smaller firms than larger ones. Finally, the authors show that the 2007/08 financial crisis had no significant impact on the relationship between financial leverage and firm performance. Originality/value: The paper provides fresh evidence on the impact of leverage on performance, particularly from the Indian context. This study is also among the first studies to examine the role of firm size and financial crisis in the leverage-performance relationship.