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Analysis of the Financial Leverage Effect in the Context of Interest Rates Increase

Author

Listed:
  • Ionescu Luiza
  • Toma Maria

    (Valahia University of Târgoviște, Romania)

  • Founanou Mathurin

    (Gaston Berger University of Saint-Louis, Senegal Franche-Comté University, Besançon, France)

Abstract

The main objective of this paper is to demonstrate the importance of a tool, called in the specialized literature, financial leverage effect, in managerial decision-making process, regarding the way to finance the assets and finding an optimal indebtedness. The research context comes as a result of the recently increase in the inflation rate, at global, European and national level. This fact led the national central banks to revise their monetary policies, mainly through the monetary policy increases interest rate. As a consequence, the commercial banks (which borrow money from the Central or National Bank) grant more expensive loans to commercial companies. Theoretical research on the conceptual approach is complemented by the case study method, whose results show that an increase in the interest rate on loans contracted by the companies, can lead to a decrease in the financial leverage effect value, until reaching even negative values.

Suggested Citation

  • Ionescu Luiza & Toma Maria & Founanou Mathurin, 2022. "Analysis of the Financial Leverage Effect in the Context of Interest Rates Increase," Valahian Journal of Economic Studies, Sciendo, vol. 13(1), pages 15-24, April.
    • Handle: RePEc:vrs:vaecst:v:13:y:2022:i:1:p:15-24:n:3
    DOI: 10.2478/vjes-2022-0002
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    More about this item

    Keywords

    Return on Equity; Return on Assets; Interest Rate; Level of Indebtedness; Financial Leverage Effect;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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