The Impact of Leverage on the Investment of the Firms
Keywords:Leverage, Investment, Profitability, Growth
This research report was performed in order to find out the relationship and the impact of leverage on the investment of the firms). Firstly the literature was studied to form the basic structure to move forward in this topic of research. The literature review recommended that investment of the firm is affected by a number of factors and leverage is one of them. The Research studies carried out in other parts of the world recommended that the relationship involving the leverage and the investment is a negative one. And the literature also recommended that the impact of leverage had to be looked closely by taking into account the other financial factors as well like sales of the firm, cash flows, liquidity, net fixed assets, profitability of the firm etc.
When taking into consideration the model for the research these factors were also seen so as to get a joint effect. In this regard the model selected was that Aivazian, Ge and Qiu (2005)).which considers the following features sales of that firm, net assets of the firm, liquidity of that firm, profitability of the firm , the cash flows of the firm and their impacts on investment.
The Next step was to select a sample and then collect the data. In this study 29 firms from 29 different sectors within Pakistan were selected and the firms were selected on the basis of the highest total assets. The data was collected from the annual reports, and State Bank of Pakistanâ€™s official website. And the share prices data was collected from the KSE s website.
After collecting the data regression was run on the data. The results of regression showed that the ROA, Cash flow, and Liquidity are the significant variables. Leverage and sale are insignificant here. The Cash flow and Liquidity are inversely related to the dependent variable. And while ROA, is in a positive relation with the dependent variable.
The recommendations in this regard are that this research can be used as the basis for further research in this area and if further research is to be done in this area the sample size is to be increased
â€¢ Akerlof, G. A. (1970), "The Market for Lemons: Quality Uncertainty and the Market Mechanism", Quarterly Journal of Economics, 84, pp. 488-500.
â€¢ Barclay, M. J., C. Smith, and R. Watts. 1995. The determinants of corporate leverage and dividend policies. Journal of Applied Corporate Finance 7:4â€“19.
â€¢ Bradley, M., G. Jarrell, and E. H. Kim. 1984. On the existence of an optimal capital structure: Theory and evidence. Journal of Finance 39:857â€“78.
â€¢ Carpenter, R. E. & Petersen, B. C. (2002). Is the Growth of Small Firms Constrained by Internal Finance? Review of Economics and Statistics. 84, 298â€“309.
â€¢ Chaplinsky, S. and G. Niehaus (1990), The Determinants of Inside Ownership and Leverage, Working Paper, University of Michigan .
â€¢ Denis, D. J. and Denis, D. K. (1993) Managerial discretion, organizational structure, and corporate performance: A study of leveraged recapitalization, Journal of Accounting and Economics, 16, 209â€“236
â€¢ Fry, Maxwell J., "Money and Capital or Financial Deepening in Economic Development?" Journal of Money, Credit, and Banking 10 (Nov. 1978), 464-475.
â€¢ Hoshi, T., Kashyap, A. and Scharfstein, D. (1991) Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups, Quarterly Journal of Economics, 106(1), 33â€“60.
â€¢ Jensen, M. C. and Meckling, W. (1976) Theory of the ï¬rm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics, 3(4), 305â€“360
â€¢ Jensen, M.C., 1986. Agency cost of free cash flow, corporate finance, and take-overs. American Economic Review 76, 323â€“329.
â€¢ Joseph C. Kang. The conditional relationship between financial leverage and corporate investment: further clarification. Journal of Business Finance & Accounting, 22(8), December 1995.
â€¢ K. Mills, S. Morling and W. Tease. 1994. The influence of financial factors on corporate investment. Economic Analysis Department Reserve Bank of Australia
â€¢ La Porta, R., Lopez-de-Silanes F., Shleifer A., & Vishny R. (2000). â€œInvestor Protection and Corporate Governance.â€ Journal of Financial Economics. 58, 2â€“27.
â€¢ La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). â€œLaw and Finance.â€ Journal of Political Economy. 106, 1113â€“1155.
â€¢ Lang, L.E., Ofek, E., Stulz, R., 1996. Leverage, investment and firm growth. Journal of Financial Economics 40, 3 â€“29
â€¢ Long, M. 1985. The investment-ï¬nancing nexus: Some empirical evidence. Midland Finance Journal 3:53â€“59.
â€¢ Manohar Singha and Sheri Fairclothb. The impact of corporate debt on long term investment and firm performance. Applied Economics, 2005, 37, 875â€“883
â€¢ McConnell, J.J., Servaes, H., 1995. Equity ownership and the two faces of debt. Journal of Financial Economics 39, 131â€“157.
â€¢ Morck, R., Schleifer, A. and Visnhy, R. N. (1988) Management ownership and market valuation, Journal of Financial Economics, 20(1/2), 293â€“315.
â€¢ Paul D. Childs, David C. Mauerb, Steven H. Ott, Interactions of corporate ï¬nancing and investment decisions: The effects of agency conï¬‚icts. Journal of Financial Economics 76 (2005) 667â€“690
â€¢ Petersen, M. A. & Rajan, R. G. (1994). â€œThe Beneï¬ts of Firm-Creditor Relationships: Evidence from Small Business Data, Journal of Finance. 49, 3â€“37.
â€¢ Peyer,U. C. and Shivdasani,A. (2001) Leverage and internal capital markets: evidence from leveraged recapitalizations, Journal of Financial Economics, 59(3), 477â€“504.
â€¢ Rajan, R., and L. Zingales. 1995. What do we know about capital structure? Some evidence from international data. Journal of Finance 50:1421â€“67.
â€¢ Smith, C., and R. Watts. 1992. The investment opportunity set, and corporate ï¬nancing, dividend, and compensation policies. Journal of Financial Economics 32:262â€“92.
â€¢ Stiglitz, J. and Weiss, A. (1983) Alternative approaches to analyzing markets with asymmetric information: reply, American Economic Review, 73(1), 246â€“249.
â€¢ Stiglitz, J.E. and A. Weiss (1981), "Credit Rationing in Markets with Imperfect Information", American Economic Review, 71, pp. 393-410.
â€¢ Thomas J. O'Brien and Paul A. Vanderheiden, Empirical Measurement of Operating Leverage for Growing Firms, Financial Management/Summer 1987, 45-46
â€¢ VALENTIN DIMITROV, PREM C. JAIN. The Value-Relevance of Changes in Financial Leverage Beyond Growth in Assets and GAAP Earnings. JOURNAL OF ACCOUNTING, AUDITING & FINANCE, pg 192.
â€¢ Wilbur G. Lewellen and William A. Kracaw. Inflation, Corporate Growth, and Corporate Leverage. Financial Management/Winter 1987, pp 35-36
How to Cite
- Papers must be submitted on the understanding that they have not been published elsewhere (except in the form of an abstract or as part of a published lecture, review, or thesis) and are not currently under consideration by another journal published by any other publisher.
- It is also the authors responsibility to ensure that the articles emanating from a particular source are submitted with the necessary approval.
- The authors warrant that the paper is original and that he/she is the author of the paper, except for material that is clearly identified as to its original source, with permission notices from the copyright owners where required.
- The authors ensure that all the references carefully and they are accurate in the text as well as in the list of references (and vice versa).
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Attribution-NonCommercial 4.0 International that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
- The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.