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Asian Journal of Research in Banking and Finance
Year : 2017, Volume : 7, Issue : 7
First page : ( 265) Last page : ( 274)
Online ISSN : 2249-7323.
Article DOI : 10.5958/2249-7323.2017.00082.7

Financial Leverage, Firm Performance and Value: with reference to Indian Manufacturing Firms

Pandey Krishna Dayal1, Dr. Sahu Tarak Nath2

1Research Scholar, Department of Business Administration, Vidyasagar University, Midnapore, West Bengal, India, krishna.9800@gmail.com

2Assistant Professor, Department of Commerce with Farm Management, Vidyasagar University, Midnapore, West Bengal, India, taraknathsahu1@rediffmail.co

Online published on 17 July, 2017.

Abstract

This empirical investigation is carried out aiming at contributing towards the existing conception on the effect of firm's financial leverage on its performance and value. The study used a moderately balanced panel data consisting of 56 manufacturing firms listed and traded on Bombay Stock Exchange (BSE) of India during the period of 2011–16. Financial leverage is presented by Debt to Equity Ratio (DER) of the sampled firms whereas firm performance and value are measured by Return on Assets (ROA) and Tobin's Q respectively. The study estimated Restricted F test, Lagrange Multiplier Test and Hausman Test for the purpose of final selection of appropriate model for the regression analysis and thereafter introduced Fixed Effect Model for the regression on such panel data Finally, the study found a significantly negative effect of financial leverage on performance and value of the sampled firms. The disciplinary role of debt as proposed by a number of eminent scholars (Jensen and Meckling's 1976, Grossman and Hart 1982) is not found to be working in this present study. The findings of this study is backed by the study of Stulz (1990) which showed how the fixed interest payment burden may force managers to forgo positive present value projects which further may adversely affect firm performance and value.

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Keywords

Financial Leverage, Firm Performance and Value.

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