The Impact of Leverage on the Investment of the Firms
Keywords:
Leverage, Investment, Profitability, GrowthAbstract
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 Pakistan’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
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