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Article
Publication date: 19 April 2022

Abedalqader Rababah, Homa Molavi and Shayan Farhang Doust

The aim of this study is to examine the effect of financial leverage impact on customer satisfaction and marketing costs including research and development (R&D) and…

Abstract

Purpose

The aim of this study is to examine the effect of financial leverage impact on customer satisfaction and marketing costs including research and development (R&D) and advertisement costs. Furthermore, the authors aim to investigate whether customer satisfaction as well as financial distress moderates the effect of financial leverage impact on customer satisfaction and marketing costs including R&D and advertisement costs.

Design/methodology/approach

The statistical population of this study consists of listed companies on the Tehran Stock Exchange manually obtained from different industries in 2017. Multivariate regression based on data compilation methodology is used to test research hypotheses.

Findings

The results indicate that financial leverage is negatively and significantly associated with customer satisfaction and this negative relationship is more pronounced in companies with lower sale growth. Furthermore, the authors' results suggest that customer satisfaction negatively (positively) and significantly affects firm value in companies with lower (higher)-financial leverage. The authors also demonstrate that there is no significant relationship between financial leverage caused by financial flexibility and firm value caused by customer's satisfaction (CS). The authors' findings also suggest that financial distress significantly affects the relationship between financial leverage and customer satisfaction. Finally, the authors' find that financial leverage significantly affects firms' R&D and advertisement costs.

Research limitations/implications

Since the fundamental institutional assumptions underpinning the Western and even East Asia financial models are not valid in the institutional environment of Iran, the authors' findings could provide substantial implications for the authors' understanding of the relationship between finance and R&D costs and contribute substantially to customer satisfaction and firm value literature as well. The sample country of the present paper has recently experienced a spate of financial collapses that somewhat contributes, indirectly, to financial distress incurred by the Iranian firms. Moreover, R&D costs are growing among the Iranian quoted firms.

Originality/value

Since the fundamental institutional assumptions underpinning the Western and even East Asia financial models are not valid in the institutional environment of Iran, the authors' findings could provide substantial implications for our understanding of the relationship between finance and R&D costs and contribute substantially to customer satisfaction and firm value literature as well. The sample country of the present paper has recently experienced a spate of financial collapses that somewhat contributes, indirectly, to financial distress incurred by the Iranian firms. Moreover, R&D costs are growing among the Iranian quoted firms.

Details

Journal of Applied Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0967-5426

Keywords

Abstract

Details

The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors Under Financial Stability
Type: Book
ISBN: 978-1-78756-837-2

Article
Publication date: 2 December 2021

Ismail Kalash

The purpose of this article is to examine how financial distress risk and currency crisis affect the relationship between financial leverage and financial performance.

Abstract

Purpose

The purpose of this article is to examine how financial distress risk and currency crisis affect the relationship between financial leverage and financial performance.

Design/methodology/approach

This study uses data of 200 firms listed on Istanbul Stock Exchange during the period from 2009 to 2019, resulting in 1950 firm-year observations. Pooled ordinary least squares, random effects, firm fixed effects and two-step system GMM models are used to investigate the hypotheses of this study.

Findings

The results reveal that financial leverage has negative and significant effect on financial performance, and that this effect is stronger for firms with higher financial distress risk. Furthermore, the findings provide moderate evidence that currency crisis exacerbates the negative association between leverage and performance.

Practical implications

The results of this study have important implications for firms in emerging markets. Managers can enhance firm performance by reducing the level of financial leverage, especially in firms with higher financial distress risk. These firms incur higher debt costs, and then they can benefit more from the decreases in debt ratio in their capital structure. Moreover, the decreases in debt level have more importance in currency crisis times, when the access to external finance becomes more expensive and more difficult.

Originality/value

To the author's knowledge, this research is the first to examine the effect of currency crisis on the financial leveragefinancial performance relationship and is one of few that investigate the role of financial distress risk in determining the linkage between leverage and firm performance.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

Keywords

Article
Publication date: 16 August 2021

Flávio Morais, Zélia Serrasqueiro and Joaquim J.S. Ramalho

The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and…

Abstract

Purpose

The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and bank-based financial systems.

Design/methodology/approach

Using logit regression methods and a sample of listed firms from 14 Western European countries for the 2002–2016 period, this study examines the propensity of firms having zero leverage in different financial systems.

Findings

Country governance mechanisms have a heterogeneous effect on zero leverage, with higher quality mechanisms increasing zero-leverage propensity in bank-based countries and decreasing it in market-based countries. Board dimension and independency have no impact on zero leverage. A higher ownership concentration decreases the propensity for zero-leverage policies in bank-based countries.

Research limitations/implications

This study’s findings show the importance of considering both country- and firm-level governance mechanisms when studying the zero-leverage phenomenon and that the effect of those mechanisms vary across financial and legal systems.

Practical implications

For managers, this study suggests that stronger national governance makes difficult (favours) zero-leverage policies in market (bank)-based countries. In bank-based countries, it also suggests that the presence of shareholders that own a large stake makes the adoption of zero-leverage policies difficult. This last implication is also important for small shareholders by suggesting that investing in firms with a concentrated ownership reduces the risk that zero-leverage policies are adopted by entrenched reasons.

Originality/value

To the best of the authors’ knowledge, this is the first study to consider simultaneously the effects of both country- and firm-level governance mechanisms on zero leverage and to allow such effects to vary across financial systems.

Details

Corporate Governance: The International Journal of Business in Society, vol. 22 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 9 November 2015

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…

1945

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
ISSN: 0959-6119

Keywords

Article
Publication date: 2 October 2019

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

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
ISSN: 2398-628X

Keywords

Article
Publication date: 1 February 2016

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.

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
ISSN: 1472-0701

Keywords

Book part
Publication date: 11 November 2014

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…

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
ISBN: 978-1-78441-066-7

Keywords

Article
Publication date: 3 February 2020

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…

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
ISSN: 2040-8749

Keywords

Article
Publication date: 3 April 2019

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…

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
ISSN: 0307-4358

Keywords

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