Effect of Financial Leverage on Firm Performance: Reference to Investment Trust Companies Listed in Sri Lanka

Authors

  • Dilini Randika University of Colombo, Sri Lanka

DOI:

https://doi.org/10.47505/IJRSS.2022.V3.4.2

Keywords:

Leverage, Liquidity, Asset Management, Performance, Investment Trust

Abstract

The research investigates the effect of financial leverage on firm performance: reference to investment trust companies listed in the All Share Price Index (ASPI) on the Colombo Stock Exchange (CSE). Data for the study were collected for the period through annual reports and analyzed data using multiple linear regressions. The Profitability,  Liquidity, and Asset Management efficiency performance of firms are measured respectively by Return on Asset, Current Ratio, and Total Asset Turnover Ratio. Financial Leverage is measured by Debt Ratio, Debt Equity Ratio, and Interest Coverage Ratio.

Based on the analysis performed, it is noted that there’s no significant relationship between financial leverage and profitability, liquidity, and asset management while having a positive significant relationship with debt ratio and asset management performance of investment trusts listed in the All Share Price Index.

References

Abdul, A. & Adelabu, I. T. (2015), Impact of Financial Leverage on Firm Performance: Evaluation of Total Nigeria Plc, International Journal of Science Commerce And Humanities, 3(6).

Alkhatib, K. (2012) The Determinants of Leverage of Listed Companies, International Journal of Business and Social Science. 3(24): 78-83.

Andy, C.W.C, Chuck, C.Y.K., & Alison, E.L. (2002). The Determination of Capital Structure: Is National Culture a Missing Piece of the Puzzle? Journal of International Business Studies, 33, 19- 32.

Anson, M.J.P. and Hudson, S.W. (2003). “Should One Use Leverage in a Private Equity Real Estate Portfolio?” The Journal of Portfolio Management, 29(5), 54–61.

Atrill, P. & McLaney E. (2008). Accounting and Finance for Non-Specialist, Edinburgh, Pearson Education limited.

Baker,S.H (1973). Risk, leverage and profitability: an industry analysis. The Review of Economic and Statistics, 55, 503-507.

Banerjee, B. (2009), Fundamentals of Financial Management, New Delhi: PHI Learning Private Limited.

Bank of Canada (2010). The Impact of Liquidity on Bank Profitability, Working paper 2010-38.

Barclay, M. & Smith, C. Jr. (1995). The maturity structure of corporate debt, Journal of Finance, 50, 609–631.

Bei Z. & Wijewardana, W.P. (2012) Financial leverage, firm growth and financial strength in listed companies in Sri Lanka. Procedia- social and behavioural scinces 40(2012) Pp 709-715

Berger, A. N. (1995). The relationship between capital and earnings in banking. Journal of Money, Credit and Banking, 27(2-5), 432-456.

Bordeleau, E., Crawford, A. & Graham, C. (2009). Regulatory Constraints on Bank Leverage: Issues and Lessons from the Canadian Experience, Bank of Canada Discussion Paper 2009-15.

Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance, 13, 65-79

Chandra, P. (2001). Financial management theory and practice, NewDelhi, Tata McGraw Hill Publishing company Limited.

Duca, J., & McLaughlin, M. (1990). Developments affecting the profitability of commercial banks. Federal Reserve Bulletin, 477–499.

Eljelly, A. (2004), Liquidity-profitability tradeoff: An empirical investigation in an emerging market. International Journal of Commerce & Management, 14(2), 48-61

Enekwe, C.I., Agu, C.I. & Eziedo, (2014), The Effect of Financial Leverage on Financial Performance: Evidence of Quoted Pharmaceutical Companies in Nigeria, IOSR Journal of Economics and Finance 5(3)

Ezeamama, M.C (2010), Fundamentals of Financial Management: A practical guide. Enugu: EMA press Ltd.

Gatsi, J.G., Gadzo, S.G. & Akoto, R.K. (2013), Degree of Financial and Operating Leverage and Profitability of Insurance Firms in Ghana. Canadian International Business and Management, 7(2): 57-65.

Greuning, H. & Bratanovic. S, (2004). Analysis and risk management banking, Bucharest, Irecson Publishing House.

Mangalam,S.C & Govindasamy,P (2010). Leverage: an analysis and its impact on profitability with reference to selected cement companies in India. Journal of Economics, Finance and Administrative Science, 27,50-75.

Niresh, J. A. (2012). Trade-off between liquidity and profitability, A Study of selected Manufacturing Firms in Sri Lanka. University of Jaffna

Njeri, M.M.K. & Kagiri, A.W. (2013), Effect of Capital Structure on Financial Performance of Banking Institutions Listed in Nairobi Securities Exchange, International Journal of Science and Research.

Njihia, J. K. (2003). Determinants of Banks profitability: the case of Commercial Banks in Kenya. Unpublished MBA research project, University of Nairobi

Omondi, M.M. & Muturi, W., (2013), Factors Affecting the Financial Performance of Listed Companies at the Nairobi Securities Exchange in Kenya, Research Journal of Finance and Accounting, 4(15).

Pandey, I.M (2010). Financial Management, New Delhi: Vikas Publishing House Limited.

Pimentel, R. C., Braga, R., & Casanova, S. P. C. (2005). Interaction between profitability and liquidity: an exploratory study. Journal of Accounting Master of Science in Accounting, UERJ, Rio de Janeiro

Rasiah, R., Gammeltoft, P. & Jiang, Y. (2010). Home Government Policies and Outward Foreign Direct Investment from Emerging Economies: Lessons from Asia, International Journal of Emerging Markets, 5(3), 333-357.

Richard, V. D. & Laughlin E. J. (1980). A Cash Conversion Cycle Approach to Liquidity Analysis Financial Management.36 (1), 32-38.

Sheel, A. (1994). Determinants of capital structure choice and empirics on leverage behavior: A comparative analysis of hotel and manufacturing firms. Hospitality Research Journal, 17, 3-16

Wald, J. K. (1999). How firm characteristics affect capital structure: an international comparison. Journal of Finance Research, 22,161-188.

Whitehead, G. (2001). Principles of accounting, 3rd edition. London, Hodder Education

Zikmund, W. G,, Babin, B. J., Carr C. J. & Griffin M., (2010). Business Research Methods, South Western, Cengage Learning, 8th Edition. x

Downloads

How to Cite

Dilini Randika. (2022). Effect of Financial Leverage on Firm Performance: Reference to Investment Trust Companies Listed in Sri Lanka . International Journal of Research in Social Science and Humanities (IJRSS) ISSN:2582-6220, DOI: 10.47505/IJRSS, 3(4), 17–25. https://doi.org/10.47505/IJRSS.2022.V3.4.2

Issue

Section

Articles