The heterogeneous effect of leverage on firm performance: a quantile regression analysis

Abstract

Purpose

The purpose of this study is to look at the effect of financial leverage on the performance of Saudi listed companies. It particularly proposes to examine the heterogeneity of this relationship depending on firm profitability and firm size.

Design/methodology/approach

The paper uses a sample of 120 nonfinancial companies listed on the Tadawul stock exchange during the period 2017–2020. Data is obtained from the companies’ financial reports. This study uses the system GMM and the quantile regression. The first methodology examines the effect of leverage decisions on firm performance, whereas the second one tests the heterogeneity of this relationship.

Findings

GMM results demonstrate the adverse effect of leverage on firm performance in terms of return on assets, return on equities and Tobin’s Q. Besides, quantile regression results show that this relationship is heterogeneous. Particularly, leverage seems to have a greater adverse effect on the performance of high-profitable firms than low-profitable firms. Moreover, leverage has a negative effect in larger firms, whereas the influence becomes negative in smaller ones.

Originality/value

This study is unique in that it approaches the capital structure issue from a different perspective, where the leverage decision is distinctly considered at various levels of firm profitability and firm size. In addition, the majority of the existing studies is carried out in developed countries. However, the results might not apply to emerging countries given the specificity of their institutional structure. In this regard, Saudi Arabia has a distinctive business climate characterized by the absence of corporate tax and an illiquid bond market.

Citation

Ghardallou, W. (2023), "The heterogeneous effect of leverage on firm performance: a quantile regression analysis", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 1, pp. 210-225. https://doi.org/10.1108/IMEFM-12-2021-0490