The Nexus between Financial Leverage and Profitability: Evidence From Top-40 Johannesburg Security Exchange (JSE) Listed Companies

Authors

  • Ntomolane Lobisa Matsoma University of South Africa

Abstract

Abstract: The study investigate the nexus between financial leverage and profitability with specific reference from top-40 JSE firms.  This study originate from emerging countries. It is on this background that this study attempts to investigate the connection between financial leverage and profitability from a South African viewpoint. The system generalized method of moments (GMM) was used to analyze the relationship between financial leverage and profitability.  The sample of 21 of the top-40 JSE firms from 2011 to 2019 was used.  The secondary data for the article were collected from Iress INET BFA database. The results of the study revealed that financial leverage has negative influence on profitability of top-40 JSE companies. Whereas other variables such as liquidity, firm size, and growth opportunity are also negatively influences profitability.  The study is restricted to the top-40 JSE companies only which means  cannot generalise the finding to all listed companies on JSE and different sectors of the economy. The study suggests that directors and managers should control and manage leverage as they improve the variety and the quality of the firm's profitability.  This results might be beneficial for future researchers, manager and investor as a point of reference.

References

Abeywardhana, D.K. (2017). Capital structure theory: An overview. Accounting and Finance Research, 6(1), p.133.

Abubakar, M.Y. & Mohammed, H. (2021). The financial leverage and financial performance of listed construction/real estate and natural resources companies in Nigeria.

Adongo, J. (2012). The effect of financial leverage on profitability and risk of firms listed at the Nairobi Securities Exchange. MBA Research Project, University of Nairobi.

Al Habsi, N.K.A. & Khalil, R. (2021). Financial Leverage and Firms’ Performance: A Study of Tri-Sector Listed Companies in Oman, 7(1), pp.19-47.

Al-Tally, H.A. (2014). An investigation of the effect of financial leverage on firm financial performance in Saudi Arabia's public listed companies. Doctoral dissertation, Victoria University.

Arellano, M. & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), pp. 277-297.

Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of econometrics, 68(1), pp. 29-51.

Banal Estanol, A.; Siciliani, P. & Yoon, K. (2022). Competition, profitability and financial leverage (No. 962). Bank of England.

Bistrova, J, Lace, N. & Peleckiene, V. (2011). The influence of capital structure on Baltic corporate performance’, Journal of Business Economics and Management, 12(4), pp. 655–669.

Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), pp. 115-143.

Breusch, T.S. & Pagan, A.R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), pp.239–253.

Dakua, S. (2019). Effect of determinants on financial leverage in the Indian steel industry: A study on capital structure. International Journal of Finance and Economics, 24(1), pp.427-436.

Daryanto, W.; Samidi, S. & Siregar, D. (2018). The impact of financial liquidity and leverage on financial performance: Evidence from property and real estate enterprises in Indonesia. Management Science Letters, 8(12), pp.1345-1352.

Dey, R., Hossain, S. & Rahman, R. (2018). Effect of corporate financial leverage on financial performance: A study on publicly traded manufacturing companies in Bangladesh. Asian Social Science, 14(12).

Dinh, H.T. & Pham, C.D. (2020). The effect of capital structure on financial performance of Vietnamese listing pharmaceutical enterprises. The Journal of Asian Finance, Economics, and Business, 7(9), pp.329-340.

Driscoll, J.C. & Kraay, A.C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80(4), pp.549-560.

Evgeny, I. (2015). The Impact of Financial Leverage on Firm Performance: Evidence from Russia. Journal of Corporate Finance Research, 34, pp.24-26.

Hausman, J.A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 46(6), pp.1251–1271.

Hongli, J., Ajorsu, E.S. & Bakpa, E.K. (2019). The Effect of Liquidity and Financial Leverage on Firm Performance: Evidence from Listed Manufacturing Firms on The Ghana Stock Exchange. Research Journal of Finance and Accounting, 10(8), pp.91-100.

Jeleel, A. & olayiwola, B. (2017). Effect of leverage on firm performance in Nigeria: A case of listed chemicals and paints firms in Nigeria. Global Journal of Management and Business Research: D Accounting and Auditing, 17 (2), pp.2249-4588.

Jensen, M. & Meckling, W. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), pp.305-360.

Källum, M. & Sturesson, H. (2017). Financial leverage: The impact on Swedish companies’ financial performance.

Kayhan, A. & Titman, S. (2007). Firms' histories and their capital structures. Journal of Financial Economics, 83(1), pp.1-32.

Kibuchi, J. (2015). The relationship between liquidity risk and financial performance of commercial banks in Kenya. MBA Project, University of Nairobi.

Lestari, H.S. (2021). Financial Leverage and Financial Performance of Conventional Banks in Indonesia. Journal of Hunan University Natural Sciences, 48(2).

Mamaro, L.P. & Legotlo, T.G. (2021). The Financial Performance and Financial Leverage of Retail Listed Firms in South Africa. Acta Universitatis Danubius. Œconomica, 17(6).

Marete, D. (2015). The relationship between firm size and financial leverage of firms listed at Nairobi Securities Exchange. Master of Business Administration, School of Business, University of Nairobi. Kenya.

Modigliani, F. & Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53 (3), pp.433–443.

Modigliani, F. & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48(3), pp.261-297.

Mohamed, I.B. (2016). Effect of financial leverage on financial performance of non-financial firms listed at the Nairobi Securities Exchange. Doctoral Dissertation, School of Business. University of Nairobi. Kenya.

Muchiri, M. J.; Muturi, W. M. & Ngumi, P. M. (2016). Relationship between Financial Structure and Financial Performance of Firms Listed at East Africa Securities Exchanges. Journal of Emerging Issues in Economics, Finance and Banking, 5 (1), pp.1734 – 1755.

Mule, R.K. & Mukras, M.S. (2015). Financial leverage and performance of listed firms in a frontier market: Panel evidence from Kenya. European Scientific Journal, ESJ, 11(7).

Myers, S.C. & Majluf, N.S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp.187-221.

Nawaiseh, M.E. (2015). Do Firm Size and Financial Performance Affect Corporate Social Responsibility Disclosure: Employees' and Environmental Dimensions? American Journal of Applied Sciences, 12(12), p.967.

Nguyen, V.; Nguyen, T.; Tran, T. & Nghiem, T. (2019). The impact of financial leverage on the profitability of real estate companies: A study from Vietnam stock exchange. Management Science Letters, 9(13), pp.2315-2326.

Nwanna, I. O. & Ivie, G. (2017). Effect of financial leverage on firm’s performance: A study of Nigerian banks. International Journal of Recent Scientific Research, 8 (7), pp.18554 – 18564.

Odit, M.P. & Chittoo, H.B. (2008). Does financial leverage influence investment decisions? The case of Mauritian firms. Journal of Business Case Studies (JBCS), 4(9), pp.49-60.

Ologbenla, P. (2018). Impact of liquidity management on the performance of insurance companies in Nigeria. IOSR Journal of Economics and Finance (IOSR-JEF), 9(1), pp.40-45.

Onofrei, M.; Tudose, M.B.; Durdureanu, C. & Anton, S.G. (2015). Determinant factors of firm leverage: An empirical analysis at Iasi county level. Procedia Economics and Finance, 20, pp.460-466.

Oseni, I.O.; Akinbode, S.O.; Babalola, D.A. & Adegboyega, S.B. (2020). Government spending and school enrolment in sub-Saharan Africa: A system GMM approach. Journal of Economics & Management, 40, pp. 91-108.

Pagach, D. & Warr, R. (2011). The characteristics of firms that hire chief risk officers. Journal of Risk and Insurance, 78(1), pp.185-211.

Papadimitri, P.; Pasiouras, F. & Tasiou, M. (2021). Financial leverage and performance: the case of financial technology firms. Applied Economics, 53(44), pp.5103-5121.

Pesaran, M.H. (2004). General diagnostic tests for cross section dependence in panels. Cambridge Working Papers in Economics No. 435, University of Cambridge, and CESifo Working Paper Series No. 1229.

Rehman, S. S. F. U. (2013). Relationship between Financial Leverage a Financial Performance: Empirical Evidence of Listed Sugar Companies of Pakistan. Global Journal of Management and Business Research Finance, 13 (8), pp.33-40.

Rahman, M.M.; Saima, F.N. & Jahan, K. (2020). The Impact of Financial Leverage on Firm's Profitability: An Empirical Evidence from Listed Textile Firms of Bangladesh. The Journal of Business Economics and Environmental Studies, 10(2), pp.23-31.

Ravindran, M. & Kengatharan, L. (2021). Impact of Financial Leverage on Firm Profitability: Evidence from Non-Financial Firms Listed in Colombo Stock Exchange-Sri Lanka. Journal Homepage: https://journals. kln. ac. lk/sajf, 1(1), pp.80-91.

Rayan, K. (2010). Financial leverage and firm value (Doctoral dissertation, University of Pretoria).

Ramli, N. A.; Latanb, H. & Solovida, G.T. (2018). Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia. The Quarterly Review of Economics and Finance 71, pp.148-160.

Samo, A.H. & Murad, H. (2019). Impact of liquidity and financial leverage on firm’s profitability–an empirical analysis of the textile industry of Pakistan. Research Journal of Textile and Apparel.

Saunders, S.; Lewis, P. & Thornhill, A. (2016). Research methods for business students. (7th Ed.). London: Prentice-Hall.

Yusoff, H. (2017). The effect of liquidity and solvency on profitability: the case of public-listed consumer product companies in Malaysia. Doctoral Dissertation, University of Malaysia.

Downloads

Published

2022-10-31

Issue

Section

Economic Development, Technological Change, and Growth