IDEAS home Printed from https://ideas.repec.org/a/cwk/eafjke/2025-17.html

Balancing Risk and Return: The Influence of Leverage on Corporate Financial Performance

Author

Listed:
  • Evans Murithi Murombi

    (Department of Business Administration, Technical University of Mombasa)

  • Esha Shaban Mohammed

    (Department of Business Administration, Technical University of Mombasa)

Abstract

This study investigates the impact of leverage on corporate financial performance, with a particular focus on financial, operating, and combined leverage. Leverage plays a critical role in influencing profitability, risk exposure, and long-term sustainability. Despite extensive academic inquiry, the relationship between leverage and firm performance remains contested, with findings often diverging across industries and economic contexts. This paper employs a literature review and synthesis methodology to explore theoretical perspectives—such as Modigliani and Miller's theorem, trade-off theory, pecking order theory, and agency theory—alongside empirical insights into how leverage influences financial outcomes. The study highlights that while moderate levels of leverage can enhance profitability through tax advantages and investment expansion, excessive reliance on debt increases financial vulnerability, particularly during economic downturns. The paper concludes by recommending that firms adopt balanced capital structure strategies, grounded in contextual industry analysis, to optimize financial outcomes and mitigate risk.

Suggested Citation

  • Evans Murithi Murombi & Esha Shaban Mohammed, 2025. "Balancing Risk and Return: The Influence of Leverage on Corporate Financial Performance," East African Finance Journal, East African Finance Journal, vol. 4(2).
    • Handle: RePEc:cwk:eafjke:2025-17
    DOI: 10.59413/eafj/v4.i2.6
    as

    Download full text from publisher

    File URL: https://ijcsacademia.com/index.php/eafj/article/view/244
    Download Restriction: no
    File URL: https://libkey.io/10.59413/eafj/v4.i2.6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 6(5), pages 438-445, November.
    3. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    4. Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 6(5), pages 438-445, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mahuya Basu, 2024. "Mediating effect of capital structure in determining firms' financial performances of Indian SMEs: a structural equation modelling approach," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 12(1/2), pages 26-46.
    2. Redson Mankishi & Austin Mwange & Windu Matoka, 2025. "Exploring the Relationship Between Capital Structure and SME Profitability: A Case Study of Lusaka's Electronic Device Market," East African Finance Journal, East African Finance Journal, vol. 4(1).
    3. Khémiri, Wafa & Noubbigh, Hédi, 2020. "Size-threshold effect in debt-firm performance nexus in the sub-Saharan region: A Panel Smooth Transition Regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 335-344.
    4. Mercè Sala‐Ríos, 2024. "What are the determinants affecting cooperatives’ profitability? Evidence from Spain," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 95(1), pages 85-111, March.
    5. Suzan Dsouza & Krishnamoorthy Kathavarayan & Franklin Mathias & Dharmesh Bhatia & Abdallah AlKhawaja, 2025. "Leveraging Success: The Hidden Peak in Debt and Firm Performance," Econometrics, MDPI, vol. 13(2), pages 1-22, June.
    6. Le, Thi Phuong Vy & Phan, Thi Bich Nguyet, 2017. "Capital structure and firm performance: Empirical evidence from a small transition country," Research in International Business and Finance, Elsevier, vol. 42(C), pages 710-726.
    7. Zaheda Daruwala, 2023. "Influence of Financial Leverage on Corporate Profitability: Does it Really Matter?," International Journal of Economics and Financial Issues, Econjournals, vol. 13(4), pages 37-46, July.
    8. B. Matemilola & A. Bany-Ariffin & W. Azman-Saini, 2012. "Financial Leverage and Shareholder’s Required Returns: Evidence from South Africa Corporate Sector," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(3), pages 601-612, March.
    9. Tak, Alina, 2016. "Impact of Capital Structure on Shareholder's Wealth," MPRA Paper 116421, University Library of Munich, Germany, revised 13 Oct 2022.
    10. Narinder Pal Singh & Mahima Bagga, 2019. "The Effect of Capital Structure on Profitability: An Empirical Panel Data Study," Jindal Journal of Business Research, , vol. 8(1), pages 65-77, June.
    11. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    12. Prince Bhatia & Rahul Kumar, 2024. "Do debt, and operating efficiency contributes to corporate performance?," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 15(3), pages 1203-1209, March.
    13. Feng-Li Lin, 2020. "Do DJIA Firms Reflect Stationary Debt Ratios?," Economies, MDPI, vol. 8(4), pages 1-19, September.
    14. Aleksandra Stoiljković & Slavica Tomić & Bojan Leković & Milenko Matić, 2022. "Determinants of Capital Structure: Empirical Evidence of Manufacturing Companies in the Republic of Serbia," Sustainability, MDPI, vol. 15(1), pages 1-19, December.
    15. Muhammad Ali Jibran Qamar & Umar Farooq & Hamayun Afzal & Waheed Akhtar, 2016. "Determinants of Debt Financing and Their Moderating Role to Leverage-Performance Relation: An Emerging Market Review," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(5), pages 300-311, May.
    16. Sarada Dakua, 2020. "Relevance of Capital Structure in Developing Countries: A Special Focus on India," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 5(1), pages 46-58, March.
    17. Stavros H. Arvanitis & Irakleia S. Tzigkounaki & Theodoros V. Stamatopoulos & Eleftherios I. Thalassinos, 2012. "Dynamic Approach of Capital Structure of European Shipping Companies," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 5(3), pages 33-63, December.
    18. Hapsah S. Mohammad & Imbarine Bujang & Taufik Abd Hakim, 2019. "Capital Structure and Financial Performance of Malaysian Construction Firms," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(12), pages 1306-1319, December.
    19. Jana STEKLA & Marta GRYCOVA, 2016. "The relationship between profitability and capital structure of the agricultural holdings in the Czech Republic," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 62(9), pages 421-428.
    20. Waqas Rasool & Farheen Kayani & Mohsin Zafar, 2011. "The Impact of Leverage Levels on Firm’s Performance and Profitability: a case of Pakistani Industries," Information Management and Business Review, AMH International, vol. 3(5), pages 242-249.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwk:eafjke:2025-17. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Charles G. Kamau (email available below). General contact details of provider: https://ijcsacademia.com/index.php/eafj .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.