An Investigation of Financial Leverage by Financial Performance

Abstract

The aim of the study is to find and explain the nature of relationship between financial leverage and financial performance of cement industry. Degree of financial leverage is explained by overall profitability, earnings per share, return on equity and return on assets of cement industry of Pakistan.   The influence of financial performance on financial leverage is investigated by Fixed and random effect approach. Random effect approach is preferred over the fixed effect approach to determine the degree of financial leverage explained by Hausmen test. Moreover the diagnostic tests are used to check the preference between two models and their perfection of the model. Empirical results are explaining that the returns on assets and earnings per share have significant impact on the financial leverage of cement industry.  There is positive correlation between them. This study provide the first attempt in investigating the impact of financial performance on financial leverage in the context of Pakistan cement industry. This study highlights the different ways in which the financial leverage of cement industry is impacted by financial performance. Research method that is employed provides an applicable framework for investigating the relationship between economic variables.

Keywords: Degree of financial leverage, Net Profit Margin (NMP), Return on Equity(ROE), Return on Assets(ROA), Earnings per Share(EPS)’ Paper type Research paper