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The effect of financial leverage on financial performance: evidence from non-financial institutions listed on the Tokyo stock market

Author

Listed:
  • Richard Arhinful
  • Mehrshad Radmehr

Abstract

Purpose - The study seeks to find the effect of financial leverage on the firm performance of non-financial companies listed in the Tokyo stock market. Design/methodology/approach - The study collected data from 263 companies in the automobile and industrial producer sectors listed on the Tokyo stock exchange between 2001 and 2021. The generalized method of moments was used to estimate the effect of leverage on financial performance due to its ability to overcome the problems of endogeneity and autocorrelation. Findings - The study found that the equity multiplier has a positive and statistically significant effect on return on assets (ROA), return on equity (ROE) and earning per share (EPS). The study discovered that the interest coverage ratio has a positive and statistically significant effect on ROA, ROE, EPS and Tobin’s Q. The results revealed that the degree of financial leverage and debt to earnings before interest, taxes, depreciation and amortization (EBITDA) have a negative and statistically significant effect on ROE, EPS and Tobin’s Q. The study also found that the capitalization ratios of the firms have a negative and statistically significant effect on ROA, ROE, EPS and Tobin’s Q. Practical implications - The use of debt financing, which presents financial leverage, indicates that the companies can make enough earnings to pay off the interest and principal (debt service obligations), which were shown by the interest coverage ratio, as well as to pay all the long-term fixed expenses, which were shown by the fixed charge coverage ratio. Interest and fixed charge coverage have a positive statistically significant effect on the financial performance of automobile and industrial producer companies. Originality/value - The study focused on the effect of financial leverage on financial performance by relying on pecking and trade-off theories to contribute to the existing body of literature in finance.

Suggested Citation

  • Richard Arhinful & Mehrshad Radmehr, 2023. "The effect of financial leverage on financial performance: evidence from non-financial institutions listed on the Tokyo stock market," Journal of Capital Markets Studies, Emerald Group Publishing Limited, vol. 7(1), pages 53-71, June.
    • Handle: RePEc:eme:jcmspp:jcms-10-2022-0038
    DOI: 10.1108/JCMS-10-2022-0038
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    Cited by:

    1. Richard Arhinful & Mehrshad Radmehr, 2023. "The Impact of Financial Leverage on the Financial Performance of the Firms Listed on the Tokyo Stock Exchange," SAGE Open, , vol. 13(4), pages 21582440231, November.

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