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The Link between Profitability and Financial Leverage, Evidence from a Small Island Economy

Author

Listed:
  • Lakshana Ramnoher
  • Keshav Seetah

Abstract

The objective of this paper was to investigate the link between profitability and financial leverage in Mauritius, a small island developing economy. For the purpose of this study data was collected from a sample of 34 companies listed on the Stock Exchange of Mauritius (SEM) for period 2007 to 2017. The pecking order theory, the modigliani and miller theory, the trade-off theory and the agency theory were used to examine the association between profitability and financial leverage in Mauritius. The findings of this research reveal a positive link between profitability and financial leverage of Mauritian listed companies. This positive relationship is consistent with the modigliani and miller theory, the trade-off theory and the agency theory. This research also reveals a negative link between firm size and profitability. This study also shows that there are no significant relationships between liquidity and profitability and between growth opportunities and profitability of Mauritian listed firms.

Suggested Citation

  • Lakshana Ramnoher & Keshav Seetah, 2020. "The Link between Profitability and Financial Leverage, Evidence from a Small Island Economy," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 12(1), pages 5885-5885, December.
    • Handle: RePEc:mth:ajfa88:v:12:y:2020:i:1:p:5885
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    References listed on IDEAS

    as
    1. 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.
    2. John Goddard & Manouche Tavakoli & John Wilson, 2005. "Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model," Applied Financial Economics, Taylor & Francis Journals, vol. 15(18), pages 1269-1282.
    3. 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)

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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