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The effect of leverage on financial performance : An analysis of European listed firms

Schutte, Maarten (2018) The effect of leverage on financial performance : An analysis of European listed firms.

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Abstract:A crucial decision for business organizations is their capital structure choice. Capital structure is about how a firm finances its business operations, so that it will maximize the total firm value. This research aims to examine the impact of leverage on financial performance for European listed companies for a period of nine years (2009-2017), with the exclusion of financial, service and government-owned companies. The performed analysis is based on ordinary least squares regression analysis. The proxies of financial performance are Tobin’s Q, ROA, ROE and RET (stock return) whereas the independent variables are book and market leverage. Previous studies determined; size, tangibility, current ratio and business risk as control variables for researching this topic. The results suggest that there is a negative impact of book and market leverage on all the proxies of financial performance. The impact is the strongest for ROE, thereafter ROA followed by Tobin’s Q and the weakest for Stock Return. In line with other researches the results show that the impact of leverage on financial performance is significant negative for ROA, ROE, Tobin’s Q and Stock Return. These results indicate that a company’s financial performance improves when they operate based on a lower debt to equity ratio. Comparing post financial crisis years 2009-2010 with the years 2011-2017 the results show no severe difference between those samples.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Business Administration MSc (60644)
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