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Article
Publication date: 7 October 2019

Corporate social responsibility investment, third-party assurance and firm performance in India: The moderating effect of financial leverage

Kofi Mintah Oware and Thathaiah Mallikarjunappa

Corporate social responsibility (CSR) has evolved since the nineteenth century and is becoming mandatory for firms. However, the association between CSR and financial…

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Abstract

Purpose

Corporate social responsibility (CSR) has evolved since the nineteenth century and is becoming mandatory for firms. However, the association between CSR and financial performance remains fluid. The purpose of this paper is to examine the mediating effect of third-party assurance (TPA) and the moderating effect of financial leverage in CSR – financial performance relationship.

Design/methodology/approach

Panel and hierarchical regression models are used to analyse data covering 29 companies in the Indian stock market for the period, from 2010 to 2017.

Findings

The study shows that CSR has a positive association with financial performance (ROA (return on assets) and ROE (return on equity)) of listed firms in India. The second finding shows that TPA has a negative association with financial performance (ROA and ROE) and negatively mediate the association between CSR and financial performance (ROA and ROE). Further, the findings also show that financial leverage has a negative association with ROA but no association with ROE, and is unable to moderate the association between CSR and financial performance. Lastly, financial leverage has no association with TPA and unable to moderate the association between CSR and TPA.

Research limitations/implications

The scope of the study is limited to large firms submitting sustainability reports based on the Global Reporting Initiative (GRI) guidelines, and this criterion is likely to limit the generalisation of the findings.

Practical implications

Capital market investors look for new markets to invest, and CSR results show a positive return for equity investors, which may encourage capital market investments in a mandatory CSR environment. The mediating effect of TPA has the potential to force managers to undertake CSR activities, which leads to a user-friendly environment and improved social sustainability.

Originality/value

Previous studies show a mix association between CSR and financial performance. Nevertheless, some of the possible reasons for the mix association have not received scholarly attention. Hence, the role of the mediating effect of TPA and the moderating effect of financial leverage in CSR-financial performance relationship.

Details

South Asian Journal of Business Studies, vol. 8 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/SAJBS-08-2018-0091
ISSN: 2398-628X

Keywords

  • Financial leverage
  • Corporate social responsibility
  • Financial performance
  • CSR investment
  • Natural Resource-based view
  • Third-party assurance reporting

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Article
Publication date: 9 November 2015

Financial leverage phenomenon in hospitality industry sub-sector portfolios

Murat Kizildag

This paper aims to seek answers to a primary question: “How much do divergent leverage factors account for fluctuations in time-varying financial leverage in leading…

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Abstract

Purpose

This paper aims to seek answers to a primary question: “How much do divergent leverage factors account for fluctuations in time-varying financial leverage in leading hospitality sub-sectors decomposed by four exclusive sub-portfolios?” In the path of seeking answers, this paper investigated the effects of both firm-specific and macroeconomic indicators to firms’ varying financial leverage in those primary sub-sectors overtime.

Design/methodology/approach

In each sub-sector portfolios, firms were sorted based on market-to-book values (Mktbk it ) with median breakpoint percentiles. For hypothesis testing, this paper constructed panel regression models with firm fixed-effects to layout fluctuant financial leverage phenomenon engaged with a set of 11 leverage factors in each Mktbk it sorted sub-sector portfolios.

Findings

Results exhibited assorted evidences. The bottom line was: firms with different market capitalization rates in each portfolio acted differently in regard to the magnitude of financial leverage across time.

Research limitations/implications

The final sample of 415 firms in four sub-sector portfolios sufficiently embraced financial leverage composition in the hospitality industry across time. However, by reason of lack of data in the other intra-hospitality industries, such as gaming and/or cruise lines, findings did not represent the firms operated in those sub-industries.

Originality/value

This paper departed from the established context of the previous literature in the manner that it expects to add to the literature by demonstrating the core drivers causing the deviations in financial structure in four exclusive, hospitality industry sub-sector portfolios with varying leverage proxies overtime.

Details

International Journal of Contemporary Hospitality Management, vol. 27 no. 8
Type: Research Article
DOI: https://doi.org/10.1108/IJCHM-07-2014-0347
ISSN: 0959-6119

Keywords

  • Firm-specific factors
  • Hospitality industry
  • Financial leverage proxies
  • Macroeconomic indicators
  • Sub-sector portfolios
  • Degree of financial leverage

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Article
Publication date: 1 February 2016

Suboptimal financial policies and executive ownership in the UK: evidence from a pre-crisis

Alfonsina Iona and Leone Leonida

The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision.

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Abstract

Purpose

The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision.

Design/methodology/approach

Firms following this policy are identified both by using a fixed classification approach and the analysis of the distribution of cash and leverage. Logit analysis is then used to estimate the probability of adopting the policy as a function of executive ownership.

Findings

Extreme financial policies are suboptimal as firms adopting these policies tend to undershoot (overshoot) their target leverage (cash holdings) ratios. The impact of the executive ownership on the probability of adopting this policy is U-shaped, in line with the alignment–entrenchment hypothesis.

Practical implications

Despite the substantial presence of non-executive directors in the boards and a significant amount of shareholdings by executive directors, the firms under analysis have adopted suboptimal financial policies possibly because poorly governed or because executive ownership is the range where entrenchment is feasible.

Originality/value

This is the first attempt at recognising policies of high cash and low leverage as being explicitly interdependent. It is also the first study focussing on the UK, a country of interest, because ownership structure is relatively dispersed. Moreover, instead of choosing fixed threshold levels of the variable in defining the extreme financial policy, this paper proposes the analysis of the distribution of cash holdings and leverage and accounts for target levels of cash and leverage.

Details

Corporate Governance: The International Journal of Business in Society, vol. 16 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/CG-01-2015-0005
ISSN: 1472-0701

Keywords

  • Executive ownership
  • Extreme financial policy

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Book part
Publication date: 11 November 2014

Effects of Market Timing on the Capital Structure of Brazilian Firms

Tatiana Albanez and Gerlando Augusto Sampaio Franco de Lima

According to the market timing theory, firms try to take advantage of windows of opportunity to raise capital by exploiting temporary cost fluctuations of alternative…

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Abstract

Purpose

According to the market timing theory, firms try to take advantage of windows of opportunity to raise capital by exploiting temporary cost fluctuations of alternative financing sources. In this context, the main objective of this paper is to examine the influence and persistence of market timing in the financing decisions of Brazilian firms that launched IPOs in the period from 2001 to 2011.

Methodology/approach

We analyze the influence of past market values on the capital structure of these firms, based on the main models proposed by Baker and Wurgler (2002), adapted to reflect the characteristics of Brazilian firms’ financial statements.

Findings

We find evidence of market timing, but this behavior is not sufficiently persistent in the period studied to the point of determining these firms’ capital structure. We believe the fact that Brazilian companies rarely carried out follow-on primary equity issues after floating their capital in the period analyzed, due to the presence of more advantageous financing sources (particularly from the national development bank, BNDES), explains the results. Therefore, Brazilian firms appear to be pay heed to different funding sources, in search of windows of opportunity, to guide their financing decisions and determine their capital structures.

Originality/value

The Brazilian capital market has been developing intensely in recent years, making it increasingly relevant to analyze the financing and investment decisions of the country’s listed companies. The Brazilian literature on capital structure is extensive, but few works have addressed the issue of market timing.

Details

Emerging Market Firms in the Global Economy
Type: Book
DOI: https://doi.org/10.1108/S1569-376720140000015013
ISBN: 978-1-78441-066-7

Keywords

  • Capital structure
  • market timing
  • windows of opportunity
  • institutional factors
  • BNDES

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Article
Publication date: 3 February 2020

Are banks misled by leverage misestimate of Chinese listed companies?

Zhenjie Wang, Zhuquan Wang and Xinhui Su

The authors point out that the existing research confuses the operational liabilities formed based on the “transaction” relationship with the financial liabilities formed…

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Abstract

Purpose

The authors point out that the existing research confuses the operational liabilities formed based on the “transaction” relationship with the financial liabilities formed based on the “investment” relationship, which not only exaggerates the value of leverage but also underestimates the level of protection that companies provide for creditors alone. That is, the confusion of concepts not only triggers the problem of leverage misestimate but also triggers the short-term financial risk misestimate. The performance of “nominal leverage” and “nominal short-term solvency” based on total assets calculation cannot reflect the real leverage level and the real short-term financial risk of enterprises.

Design/methodology/approach

To distinguish the concepts of “assets” and “capital” and rationalize the relationship between “transactions” and “investments”, authors systematically design the “real leverage” indicators and “real short-term solvency” indicators, and measure the degree of misestimate of leverage and short-term financial risk indicators by traditional research. On this basis, this paper describes and analyses the trends of leveraged misestimate and short-term financial risk misestimate of listed companies in China and analyses which companies have more serious leverage misestimate. And it helps readers to form an objective understanding of the leveraged misestimate and short-term financial risk misestimate of listed companies in China.

Findings

Firstly, the overall high level of leverage of listed companies in China in the traditional sense is largely because of the misestimate of indicators. And this kind of misestimate is more serious among firms that have advantages in trading, such as state-owned enterprises and firms with higher market shares. Secondly, for most firms with normal solvency, traditional research systematically overestimated the negative impact of “nominal leverage” on financial risk indicators (represented by short-term solvency). The overestimation is significant in firms with serious leverage misestimate. Thirdly, indicators’ misestimate of the traditional research makes the banks cannot make effective credit decisions according to the firm's “real leverage” and “real short-term solvency”.

Originality/value

Firstly, clarify the differences between the concepts of “assets” and “capital”, and clarify the level of “real leverage” of listed companies in China, which is conducive to the process of “de-leveraging”. Secondly, revise the problem of misestimate of related indicators, so that financial institutions can clearly identify the true profitability and real risk level of the entity domain, and thus improve the effectiveness of credit decisions.

Details

Nankai Business Review International, vol. 11 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/NBRI-12-2019-0067
ISSN: 2040-8749

Keywords

  • Capital
  • Real leverage
  • Real short-term solvency
  • Financial risk

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Article
Publication date: 8 April 2019

Business uncertainty and financial leverage: should the firm double up on risk?

Khaled Elkhal

The purpose of this paper is to examine the nature of the relationship between business risk and financial leverage. While past theoretical and empirical studies on this…

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Abstract

Purpose

The purpose of this paper is to examine the nature of the relationship between business risk and financial leverage. While past theoretical and empirical studies on this topic use similar variables, overall, their findings are inconclusive. In this paper, the author contends this is partially due to inappropriate proxies for business risk that are commonly used in these research papers. To correct for this misspecification, this paper proposes an alternative proxy for business risk that is isolated from the effects of financial leverage.

Design/methodology/approach

Past research on the relationship between business risk and financial leverage uses some variations in a firm’s operating cash flow as a proxy for business risk. This proxy cannot solely reflect business risk and may very well be affected by the level of financial leverage, especially for financially distressed firms. This paper proposes an alternative proxy for business risk that is isolated from the effects of financial leverage. This proxy is the cost of capital of an all-equity firm. The theoretical model developed in this paper is based on deriving the optimum level of debt as a function of business risk in the context of the Modigliani and Miller Proposition II model.

Findings

The findings show a positive linkage between business risk and financial leverage. This relationship is robust to the various forms the cost of financial distress function may take.

Originality/value

The mixed findings in past research papers regarding the relationship between business risk and financial leverage are mainly due to “inappropriate” measures of business risk that do not only reflect one firm attribute and are contaminated with other factors mainly financial leverage. As such, since the variable of interest is misspecified, the outcome of these studies cannot be credible. This paper attempts to correct for such misspecification by proposing a proxy that only reflects business risk. In addition, the proposed model is based on the widely acceptable Modigliani and Miller static theory of capital structure.

Details

Managerial Finance, vol. 45 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/MF-10-2018-0491
ISSN: 0307-4358

Keywords

  • Business risk
  • Financial distress
  • Financial leverage
  • G310
  • G320
  • G330
  • G390

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Article
Publication date: 6 July 2015

Dynamic performance, financial leverage and financial crisis: evidence from GCC countries

Rami Zeitun and Ali Salman Saleh

The purpose of this paper is to investigate the effects of financial leverage on firm’s performance in Gulf Cooperation Council (GCC) countries. Additionally, this paper…

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Abstract

Purpose

The purpose of this paper is to investigate the effects of financial leverage on firm’s performance in Gulf Cooperation Council (GCC) countries. Additionally, this paper investigates the impact of recent financial crisis on GCC firms.

Design/methodology/approach

The authors argue that the firm’s performance has a dynamic relationship that cannot be measured in cross-sectional data. Hence, the authors use a panel data to examine the effect of financial leverage on firm’s performance using the dynamic Generalised Method of Moments (GMM) estimator.

Findings

The results from the GMM estimator show that companies’ leverage is a significant determinant of firm’s performance in GCC countries. The authors also found that financial crisis had a negative and significant impact on firms’ performance in GCC countries.

Research limitations/implications

First, the data used in this paper rely on information published by the firms, and therefore, the robustness of the results were limited by the accuracy of the data provided. Second, failed firms were excluded from the study sample which may affect the results. Third, macroeconomic variables could be used in future research to investigate their impact on companies’ performance before and after the global financial crisis. Fourth, some other important variables (such as firm age and firm ownership) could be used in future studies to examine the effects of the 2008 financial crisis on companies’ performance.

Practical implications

This research provides initial guidelines for policy makers in GCC countries to understand how to enhance the performance of their firms using financial leverage and other firm-specific factors.

Originality/value

This is a first comprehensive study to investigate the effect of capital structure and financial crisis on firms’ performance in GCC countries.

Details

EuroMed Journal of Business, vol. 10 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/EMJB-08-2014-0022
ISSN: 1450-2194

Keywords

  • GMM
  • Financial crisis
  • Dynamic performance
  • Financial leverage

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Article
Publication date: 11 November 2020

Leverage and performance: do size and crisis matter?

Albert Danso, Theophilus A. Lartey, Daniel Gyimah and Emmanuel Adu-Ameyaw

This paper contributes to the capital structure literature by examining the impact of financial leverage on firm performance and also the extent to which firm size and…

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Abstract

Purpose

This paper contributes to the capital structure literature by examining the impact of financial leverage on firm performance and also the extent to which firm size and crisis matter in the leverage -performance relationship.

Design/methodology/approach

Using data from 2403 Indian firms during the period 1995–2014, generating a total of 19,544 firm-year observations, panel econometric methods are employed to test the leverage-performance relationship.

Findings

Drawing insights from agency theory and using Tobin's Q (TQ) as our main measure of performance, the authors uncover that financial leverage is negatively and significantly related to firm performance. The authors also observe that the impact of financial leverage on firm performance is lower for smaller firms than larger ones. Finally, the authors show that the 2007/08 financial crisis had no significant impact on the relationship between financial leverage and firm performance.

Originality/value

The paper provides fresh evidence on the impact of leverage on performance, particularly from the Indian context. This study is also among the first studies to examine the role of firm size and financial crisis in the leverage-performance relationship.

Details

Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
DOI: https://doi.org/10.1108/MF-10-2019-0522
ISSN: 0307-4358

Keywords

  • Leverage
  • Firm performance
  • Financial crisis
  • India
  • G01
  • G30
  • G31
  • G32

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Article
Publication date: 18 November 2019

Cross-border acquisition and financial leverage: the empirical evidence from acquisition in Asia

Fadhil Rahmat Novialdi and Ratna Wardhani

This study aims to find empirical evidence on the effect of cross-border acquisition (CBA) on the financial leverage of the acquirer from Asia. It also examines the…

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Abstract

Purpose

This study aims to find empirical evidence on the effect of cross-border acquisition (CBA) on the financial leverage of the acquirer from Asia. It also examines the moderating role of the target countries (developed or developing countries) and experience of the acquirer in the foreign market on the relationship between CBA and financial leverage.

Design/methodology/approach

This study uses pooled data regression using 1,073 acquisition transactions by Asian Acquirer from 2012 to 2014.

Findings

The results show that before the acquisition, the leverage level of CBA firms is higher than the domestic acquisition firms and after the acquisition. CBA firms increase their leverage. This study also shows that the increasing leverage post the CBA is lower if the target comes from developed countries rather than developing countries and acquirer’s experience in international activities does not affect the impact of CBA on acquirer’s post-acquisition financial leverage.

Originality/value

The study contributes to the literature by providing empirical evidence of the impact of CBA on leverage in the context of Asian countries. By contrast, most of the Asian countries are developing countries, and the institutional environment across countries in Asia is different from developed countries from other regions.

Details

Meditari Accountancy Research, vol. 28 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/MEDAR-12-2018-0413
ISSN: 2049-372X

Keywords

  • Asia
  • Leverage
  • Emerging market
  • Cross border acquisition
  • M41
  • G34

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Article
Publication date: 11 December 2017

“Understanding restaurant firms” debt-equity financing

Sung Gyun Mun and SooCheong (Shawn) Jang

The purpose of this study was to extend the understanding of restaurant firms’ overall debt and equity financing practices by considering what drives equity financing…

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Abstract

Purpose

The purpose of this study was to extend the understanding of restaurant firms’ overall debt and equity financing practices by considering what drives equity financing. More importantly, this study attempted to identify whether an optimal financial leverage point exists in the relationship between debt financing and equity financing for restaurant firms.

Design/methodology/approach

This study used fixed-effects regression models with a sample of 1,549 unbalanced firm-year panel data to identify restaurant firms’ financial practices and the impacts of financial constraints.

Findings

First, restaurant firms tend to issue long-term debt to pay back existing debt. However, the amount of debt does not exactly match the debt’s maturity. Second, small restaurant firms’ net debt financing, as well as net equity financing, has an inverted-U-shaped relationship with financial leverage. Finally, the effect of financial leverage on external financing significantly differs between small and large restaurant firms.

Practical implications

Restaurant firms routinely use both debt and equity financing interchangeably to manage their financial constraints and target debt ratio. Further, firm size is an important indicator of financial constraints, while equity financing plays an important role in managing an optimal target debt ratio.

Originality/value

This study is unique in that it considers determinants of restaurant firms’ long-term debt financing as well as equity financing. This study also examines differences in long-term debt and equity financing practices between financially constrained and unconstrained firms.

Details

International Journal of Contemporary Hospitality Management, vol. 29 no. 12
Type: Research Article
DOI: https://doi.org/10.1108/IJCHM-07-2016-0342
ISSN: 0959-6119

Keywords

  • Debt financing
  • Equity financing
  • Pecking order theory
  • Debt maturity
  • Optimal leverage point

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