The Impact of Financial Leverage on A Company’s Market Valuation

• Authors: Artur Zimny
• Languages of publication: EN

Abstracts

EN

The purpose of the article is to examine the impact of leverage on the market valuation of companies. The article verifies two hypotheses: 1. the degree of leverage is an important factor that impacts the market valuation of companies; 2. for companies with a high level of leverage, the impact of this leverage on their valuation is negative, and for companies with a low level of leverage, the impact is positive.The methodology of the study includes a critical literature review and empirical research based on correlation and regression analysis, including univariate and multivariate regression. The analysis covered quarterly data of ten energy companies listed on the Warsaw Stock Exchange. An important component of the research was classifying those companies into several groups, depending on their level of debt ratio in relation to the industry median debt ratio.The results of the research: The literature review did not provide an unequivocal conclusion to the problem. The empirical analysis did not give grounds to reject the first hypothesis; however, the second one was rejected. The research showed positive correlation and regression coefficients between the debt ratio and the price to book value ratio for highly leveraged companies and negative ones for companies with a low level of debt. The results are surprisingly contrary to the expectations based on theoretical premises.

Keywords

EN

financial leverage; capital structure; company financing; company valuation

• Publisher: Uniwersytet Łódzki. Wydawnictwo Uniwersytetu Łódzkiego
• Journal: Finanse i Prawo Finansowe
• Year: 2020
• Volume: 4
• Issue: 28
• Pages: 185-190

Dates

published

2020-12-31

Contributors

author

Artur Zimny

• University of Lodz, The Faculty of Economics and Sociology

• https://orcid.org/0000-0002-6658-952X

References

• Acheampong P., Agalega E., Shibu A.K., 2014, The Effect of Financial Leverage and Market Size on Stock Returns on the Ghana Stock Exchange: Evidence from Selected Stocks in the Manufacturing Sector, „International Journal of Financial Research”, vol. 5, no. 1.
• Adenugba A.A., Ige A.A., Kesinro, O.R., 2016, Financial Leverage and Firms’ Value: A Study of Selected Firms in Nigeria, „European Journal of Research and Reflection in Management Sciences”, vol. 4, no. 1.
• Dita A.H., Murtaqi I., 2014, The Effect of Net Profit Margin, Price To Book Value and Debt To Equity Ratio to Stock Return in the Indonesian Consumer Goods Industry, „Journal Of Business And Management”, vol. 3, no. 3.
• Gill A., Obradovich J., 2012, The Impact of Corporate Governance and Financial Leverage on the Value of American Firms, „International Research Journal of Finance and Economics”, issue 91.
• Hatfield G.B., Cheng L.T.W., Davidson W.N., 1994, The Determination of Optimal Capital Structure: The Effect of Firm and Industry Debt Ratios on Market Value, „Journal Of Financial And Strategic Decisions”, vol. 7, no. 3.
• Hirdinis M., 2019, Capital Structure and Firm Size on Firm Value Moderated by Profitability, „International Journal of Economics and Business Administration”, vol. VII, issue 1.
• Hodgson A., Stevenson-Clarke P., 2000, Accounting Variables and Stock Returns: The Impact of Leverage, „Pacific Accounting Review”, vol. 12, no. 2.
• Ibrahim U.A., Isiaka A. Q., 2020, Effect of Financial Leverage on Firm Value: Evidence From Selected Firms Quoted on the Nigerian Stock Exchange, „European Journal of Business and Management”, vol.12, no. 3.
• Jao R., Hamzah D., Laba A.R., Mediaty, 2020, Investor Decision in Estimating the Effect of Earning Persistence, Financial Leverage, Foreign Ownership Toward Company Reputation and Company Value, „International Journal of Financial Research”, vol. 11, no. 4.
• Lestari E.P., Astuti D., Basir M.A., 2020, The role of internal factors in determining the firm value in Indonesia, „Accounting”, no. 6.
• Łukasik G., Naczyński D., 2015, Rola struktury kapitału w kształtowaniu wartości przedsiębiorstwa (elementy teorii, doświadczenia praktyki) (The Role of Capital Structure Management (Elements of the Theory, Experience, Practice)), „Zeszyty Naukowe Szkoły Głównej Gospodarstwa Wiejskiego. Ekonomika i Organizacja Gospodarki Żywnościowej”, nr 112.
• Marlina T., 2013, Pengaruh Earning Per Share, Return On Equity, Debt To Equity Ratio dan Size Terhadap Price To Book Value, „Jurnal Ilmiah Akuntansi Kesatuan”, no. 1(1).
• Modigliani F., Miller M.H., 1958, The Cost of Capital, Corporation Finance, and the Theory of Investment, „The American Economic Review”, vol. 48, no. 3.
• Muradoglu G., Sivaprasad S., 2008, An Empirical Test on Leverage and Stock Returns, Working Paper Series, Cass Business School, London.
• Nissim D., Penman S.H., 2003, Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios, „Review of Accounting Studies”, vol. 8.
• Pandya B., 2016, Impact of Financial Leverage on Market Value Added: Empirical Evidence from India, „Journal of Entrepreneurship, Business and Economics”, vol. 4(2).
• PeiZhi W., Ramzan M., 2020, Do corporate governance structure and capital structure matter for the performance of the firms? An empirical testing with the contemplation of outliers, „PLoS ONE”, no. 15(2): e0229157, https://doi.org/10.1371/journal.pone.0229157 [accessed 11.12.2020].
• Rizqia D.A., Aisjah S., Sumiati, 2013, Effect of Managerial Ownership, Financial Leverage, Profitability, Firm Size and Investment Opportunity on Dividend Policy and Firm Value, „Research Journal of Finance and Accounting”, vol. 4, no. 11.
• Singh A.K., Bansal P., 2016, Impact of Financial Leverage on Firm’s Performance and Valuation: A Panel Data Analysis, „Indian Journal of Accounting”, vol. XLVIII(2).
• [Biznesradar] www.biznesradar.pl [accessed 18–31.07.2020]
• [Stooq] www.stooq.pl [accessed 18.07.2020]

Identifiers

DOI

10.18778/2391-6478.4.28.10