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The Effect of Financial Leverage on Operating Performance: Evidence from the Czech Republic

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  • Zdeněk Toušek
  • Barbora Malinská
  • Martin Prokop
  • David Procházka

Abstract

The paper investigates the relationship of financial leverage and operating performance in a small open economy. A comprehensive sample consists of panel data from 1,821 Czech firms over the period 2006 to 2017. We find that leverage has a negative effect on the operating performance for the entire sample as well as for subsamples structured according to size or sector. We also find evidence that the relationship between leverage and performance in some sectors and segments is weakened during periods of economic downturn, as well as during the recent foreign exchange interventions of the Czech National Bank. Our study, focusing on the banking perspective, contributes to the debate about the impact of differences in leverage across sectors and segments on the capital allocation channels, managed in small open economies predominantly by banks.

Suggested Citation

  • Zdeněk Toušek & Barbora Malinská & Martin Prokop & David Procházka, 2021. "The Effect of Financial Leverage on Operating Performance: Evidence from the Czech Republic," Prague Economic Papers, Prague University of Economics and Business, vol. 2021(4), pages 381-401.
    • Handle: RePEc:prg:jnlpep:v:2021:y:2021:i:4:id:774:p:381-401
    DOI: 10.18267/j.pep.774
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial leverage; operating performance; firm size; Czech Republic;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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