“Leverage-induced profitability in Bangladeshi firms: An empirical analysis”

The intent of the inquiry is to extensively examine the impact of leveraged financing on firm performance in Bangladesh, revealing the subtle dynamics of leverage-induced profitability and emphasizing the importance of a balanced debt and equity structure for financial sustainability in emerging markets. To explore how financial leverage in an entity’s capital structure affects a business’s financial sustainability and analyze how it may be used to improve company performance, the study has employed a 22-year data set (2000–2021) from the Dhaka Stock Exchange. To perform Fixed Effect Regression based on the Hausman test, ‘Firm performance’ is used as the re-gressand, which was further proxied by Earnings per Share, Return on Assets, Return on Equity, and Basic Earning Power respectively. Alternatively, proxy variables for the regressor ‘Financial leverage’ include Debt-to-Equity, Debt-to-Asset, Current Liability-to-Equity, and Current Liability-to-Asset. The test has shown that leverage in the capital structure could lead to both favorable and unfavorable effects in emerging countries like Bangladesh. Age, along with Debt-to-Asset, has shown a substantial negative impact on Earnings per Share. Also, the Debt-to-Asset and Current Liability-to-Asset negatively affect the Return on Assets. However, Debt-to-Equity, Current Liability-to-Equity and Size have a substantial positive impact, however Age has a negative effect on Return on Equity. Lastly, Debt-to-Asset has shown a positive impact on Basic Earning Power. The findings suggest that balancing debt and equity is crucial to benefit from leverage-induced profitability, and the models can be extended or amended across industries to expand the study on this persistent leverage-induced profitability argument.


INTRODUCTION
The term 'Financial Leverage' can be denoted by way of the use of liability to fund a firm's assets where there is an implied anticipation that the capital gain from a newly acquired asset will surpass the expenses associated with borrowing.Conventionally, a firm can choose to finance its assets through debt and equity or a mix of both aiming for an optimum capital structure.This in general helps to facilitate the achievement of an optimum equilibrium that effectively mitigates the expenses and maximizes the value for shareholders.If firms use more debt in the financial architecture, then a greater amount of borrowed funds from creditors results in a greater interest payment that heads towards a lesser amount of net earnings for an enterprise implying inferior productivity.During an economic surge, higher financial leverage proves to be beneficial for a firm.Still, on the contrary, during an economic slump, this fiscal leverage has an adverse outcome on a not exert any influence on a firm's value.However, a sizable amount of research has revealed that leveraged financing exerts a big impact on any concern's valuation.The supporters of including leverage in the financial architecture (Jermias, 2008; and others) hold the viewpoint that by reason of the inclusion of debt financing in the firm's financial architecture, which is believed to enhance efficiency and provide a tax shelter; there occurs a positive affiliation between the inclusion of liability and the enterprise value.For the divergence, some scholars (Phillips & Sipahioglu, 2004; Qureshi, 2007; and others) hold a different belief of an adverse connotation between the induction of leverage and an enterprise's economic viability.
As far as the published evidence allows us to apprehend, we could reach inconclusive conclusions and data about the link between a concern's value and its economic leverage, therefore lacking a definitive outlook on this correlation.Hence, a thorough and methodical enquiry is obligatory on capital structure and to be more precise, on leverage-induced profitability for firms belonging to different industries.Given the probable causes for these varying results, for instance, diverse sample time frames, sample countries, prototypical stipulations, and hypothesized relations among countless research, this study can help improve the existing theories by exploring the dynamics of leverage-induced profitability in a burgeoning economy as Bangladesh.

LITERATURE REVIEW AND HYPOTHESES
The pecuniary literature has conventionally investigated the affiliation between debt obligations and a venture's productivity from the standpoint that the incorporation of debt in an organization's financial edifice induces profitability.Most studies have revealed an undesirable connection in the cases of profitability induced by incorporating leverage.
However, the ideal degree of debt in a funding mix is still not evident to financial administrators, and the extent of incorporation of leverage depends on the discretion of the management.Various researchers used distinct research models in the past to designate the ideal degree of debt in capital construction.The forerunner exertion of Modigliani and Miller (1958) concerning the funding mix facilitated a tangible substance in the advancement of the notional background, which arranged a track for the arrival of concepts in the upcoming times.The theory, popularly known as 'Capital Structure Irrelevance', was grounded on selective assumptions about the atomistic market in the non-appearance of taxes, insolvency costs, and unequal information.It was argued that the allocation of securities held by a firm has no impact on its overall value.Since this pivotal concept was fixated on some impractical conventions, in 1963, the authors revised their 1958 deduction and asserted that in the occurrence of competitive financial markets and taxation of both shareholders and the business, the worth of the leveraged firm would be equivalent to the worth of the unlevered companies.
Baxter (1967) presented a different view that the widespread usage of debt upsurges the likelihood of liquidation as firms are obliged to meet continual interest payments and the principal borrowed.These obligations enhance the firms' probabilities of insolvency and financial distress; therefore, the stockholders claim additional premiums due to this increased risk.
Later in the time, it was suggested that undoubtedly bankruptcy cost coexists with debt financing, but it is fairly insignificant equated to tax benefits (Miller, 1977).In keeping with the 'Trade-off Theory', solvent firms should borrow further with the intention of taking more tax advantages as there exists a presumed positive correlation between leverage and profitability.In another study conducted by Schulz (2017), the capital structure's effect on the efficiency of firms in the Netherlands was examined where the association between ROA and several independent factors, including total leverage and short-term debt, were studied through the application of regression techniques that lead to a finding of a negative relationship between ROA and indicators of leverage.
Correspondingly, in a study by Hossain (2016)  Puri (2023) examined the influence of leverage on the financial performance of both small and large publicly traded companies in the context of New Zealand.A combination of univariate and multivariate techniques was employed, including correlation analysis and panel data regression.
The findings indicated that the use of leverage has a notable positive effect on the performance of small enterprises, while concurrently exerting a negative influence on their market value.In the context of large enterprises, a contrasting pattern emerges whereby firms exhibit an elevated market value when their capital structure incorporates a greater proportion of debt, and it stresses that an ideal debt structure and debt use can boost an organization's performance.
An investigation surrounding 200 firms registered on the Istanbul Stock Exchange by Kalash (2023) discovered that the influence of leveraged funds on a firm's economic performance is undesirable, and this negative effect becomes bigger for firms with greater financial distress risk.
Another study by Tao et al. (2020) advised that businesses should ponder both operational and financial leverage to capitalize on their performance since the predilection of one over the other upsurges insolvency risk.It further suggested that preference towards using operating leverage tends to result in a negative relationship between its profitability and financial leverage.
To summarize, it is conceivable to conclude that the empirical data offers a variety of contradictory theories about how financial leverage affects an advanced economy's firm's performance.Furthermore, there is an inadequate number of studies that empirically test such relationships in developing countries like Bangladesh particularly in the prominent manufacturing sectors like cement and ceramic industries combined together.This study intends to enhance the current understanding of this topic by addressing this deficiency and looking at how financial leverage affects a firm's performance within all the listed companies across the Bangladeshi Cement and Ceramic sectors for 22 years, i.e. 2000 to 2021, which happen to occupy a significant portion of the market, and thus empirically investigate the viability of the findings on leverage-induced profitability from the milieu of Bangladesh.
Building upon the scope of research discussed earlier, the below-mentioned sixteen (16) hypotheses have been developed in this study to find the subtleties of leverage-induced profitability in Bangladesh: H 01 : There is a significant impact of Debt-to-Equity Ratio on EPS.
H 02 : There is a significant impact of Debt Ratio on EPS.
H 03 : There is a significant impact of Current Liability-to-Equity Ratio on EPS.
H 04 : There is a significant impact of Current Liability-to-Asset Ratio on EPS.
H 05 : There is a significant impact of Debt-to-Equity Ratio on ROA.
H 06 : There is a significant impact of Debt Ratio on ROA.
H 07 : There is a significant impact of Current Liability-to-Equity Ratio on ROA.
H 08 : There is a significant impact of Current Liability-to-Asset Ratio on ROA.
H 09 : There is a significant impact of Debt-to-Equity Ratio on ROE.
H 10 : There is a significant impact of Debt Ratio on ROE.
H 11 : There is a significant impact of Current Liability-to-Equity Ratio on ROE.
H 12 : There is a significant impact of Current Liability-to-Asset Ratio on ROE.
H 13 : There is a significant impact of Debt-to-Equity Ratio on BEP.
H 14 : There is a significant impact of Debt Ratio on BEP.
H 15 : There is a significant impact of Current Liability-to-Equity Ratio on BEP.
H 16 : There is a significant impact of Current Liability-to-Asset Ratio on BEP.

METHODOLOGY
For the study, secondary data have been taken for the time span of 2000 to 2021 from the yearly audited financial statements of all the corporations registered in the Cement and Ceramic subdivisions.In this study, 'Financial Performance', or 'Profitability', has been considered as the dependent variable.According to Leontief (2011), it is regarded as a broad indicator of the long-term financial stability of a company.'Financial leverage' has been considered as an independent variable appertaining to the presence of debt in a company's capital structure, as asserted by Pandey (2008).
Four and Equity ratios.This study takes the Age and Firm Size as control variables as there is a high possibility that many other factors besides financial leverage also affect the firm's performance.All of the variable's measurement tools are given in Table 1.
The theoretical structure of this investigation is given Figure 1.
In this study, the 'Fixed Effect Regression' model has been employed after conducting the 'Hausman test' using Stata software, which examines the connection between a company's economic viabil-ity and financial liability.The primary model for analysis takes the below-mentioned form: , where it Y -Indicator of the outcome variable, i.e.

RESULTS
The affiliation between leveraged finance and a firm's economic performance has been investigated using correlation analysis.The multicollinearity test has been used in this study to determine whether there is any multicollinearity issue.The tests have been conducted taking each independent variable separately with all the dependent and control variables.The test results show that there is no value higher than 0.80.As the threshold value to detect multicollinearity is more than 0.80, there's no multicollinearity in this analysis.
To analyze the aspects of leverage-induced profitability, Regression Analysis has been used in this study.To identify the regression model that properly fits the analysis, the Hausman test has been used, and based on the result of the Hausman test, the fixed effects model has been employed.
Table 2 displays the conclusions of fixed effect regression model analysis where the dependent variable is Earnings Per Share (EPS), and the predictor variable is Debt-to-Equity (D/E).The R squared is 69.97%, implying that the independent variable of the model can predict a 69.97% variation in the dependent variable.The analysis exhibits that Age has a significant impact on EPS at a 1% significance level.
Table 3 shows the outcomes of fixed effect regression model analysis where the outcome variable is Earning Per Share (EPS), and the independent variable is Debt-to-Asset (D/A).The R squared is 72.43%, implying that the independent variable of the model can predict a 72.43% variation in the dependent variable.The analysis exhibits that the Debt-to-Asset Ratio and Age of the firm have a significant impact on EPS at a 1% significance level.
Table 4 shows the outcomes of fixed effect regression model analysis where the outcome variable is Earning Per Share (EPS), and the regressor variable is Current Liability-to-Equity (CL/E).The R squared is 70.12%, implying that the independent variable of the model can predict a 70.12% variation in the dependent variable.The analysis exhibits that Age has a significant impact on EPS at a 1% significance level.
Table 5 shows the results of fixed effect regression model analysis where the dependent variable is Earning Per Share (EPS), and the regressor variable is Current Liability-to-Asset (CL/A).The R squared is 70.66%, implying that the independent  variable of the model can predict a 70.66% variation in the dependent variable.The analysis exhibits that Age has a significant impact on EPS at a 5% significance level.
Table 6 shows the findings of fixed effect regression model analysis where the outcome variable is Return of Asset (ROA), and the regressor variable is Debt-to-Equity (D/E).The R squared is 11.73%, implying that the independent variable of the model can predict an 11.73% variation in the dependent variable.The analysis exhibits that the control variable, Size, is highly associated with ROA at a 10% significance level.Table 11 depicts the results of fixed effect regression model analysis where the predicted variable is Return on Equity (ROE), and the independent variable is Debt-to-Asset (D/A).The R squared is 5.89%, implying that the independent variable of the model can predict a 5.89% variation in the dependent variable.The analysis exhibits that size has a significant impact on ROE at 1% significance level.
Table 12 shows the results of fixed effect regression model analysis where the dependent variable is Return on Equity (ROE), and the independent variable is Current Liability-to-Equity (CL/E).The R squared is 31.20%,implying that the independent variable of the model can predict a 31.20%variation in the dependent variable.The analysis exhibits that Current Liability-to-Equity (CL/E) and size have a significant impact on ROE at a 1% significance level.
Table 13 depicts the results of fixed effect regression model analysis where the dependent variable is Return on Equity (ROE), and the independent variable is Current Liability-to-Asset (CL/A).The R squared is 6.79%, implying that the independent variable of the model can predict a 6.79% variation in the dependent variable.The analysis exhibits that Age and Size have a significant impact on ROE at a 10% and 1% significance level, respectively.Note: The symbols ***, **, and * correspond to respective significance levels of 1%, 5%, and 10%.
Table 14 demonstrates the results of the fixed effect regression model analysis where the dependent variable is Basic Earning Power (BEP), and the explanatory variable is Debt-to-Equity.The R squared is 10.08%, implying that the independent variable of the model can predict a 10.08% variation in the outcome variable.The analysis shows that no variable has a significant impact on BEP.
Table 15 demonstrates the results of the fixed effect regression model analysis where the dependent variable is Basic Earning Power (BEP), and the regressor variable is Debt-to-Asset (D/A).The R squared is 7.63%, implying that the independent variable of the model can predict a 7.63% variation in the dependent variable.The analysis exhibits that the Debt-to-Asset ratio has a substantial impact on BEP at a 1% significance level.
Table 16 demonstrates the results of the fixed effect regression model analysis where the dependent variable is Basic Earning Power (BEP), and the independent variable is Current Liability-to-Equity (CL/E).The R squared is 6.56%, implying that the independent variable of the model can predict a 6.56% variation in the dependent variable.The analysis exhibits that no variable has a noteworthy impact on BEP.
Table 17 shows the results of the fixed effect regression model analysis where the dependent variable is Basic Earning Power (BEP), and the independent variable is Current Liability-to-Asset (CL/A).The R squared is 13.80%, implying that the independent variable of the model can predict 13.80% variation in the dependent variable.The analysis exhibits that no variable has a significant impact on BEP.It should be noted for all the aforementioned models that, there is no multicollinearity since no VIF value in these models is higher than threshold 10.The tolerance threshold is quantified using the inverse of the variance inflation factor (1/VIF), indicating the absenteeism of multicollinearity when the values exceed 0.10.

DISCUSSION
The findings in the previous section exhibit that Age and D/A have a significant negative impact on EPS, which implies that, as the firms age and as the ratio of debt in financing the assets increases, the firm's profitability reduces.The study further exhibits that the control variable Firm Size is highly associated with ROA in most cases, implying that as firms grow bigger, they tend to enjoy more profitability owing to economies of scale.It is further seen that the D/A negatively affects ROA, implying that the incorporation of debt reduces profitability for these firms.
The test results also exhibit that the CL/A has a remarkable negative effect on ROA, implying that the return on assets of a firm gets reduced when more current liability is sought to finance assets.However, it is further investigated that D/E and Size have a significant positive impact on ROE, implying that the increase of debt in the capital structure increases profitability as firms grow bigger.The results also verify that CL/E have a significant positive impact on ROE, implying that the return on equity increases as more current liability is employed to fund the assets in a firm.However, the impact of Age remains negative yet significant on ROE, implying that firms fail to generate more return on equity as they grow old.The results of regression analysis reveal that D/A has a significant impact on BEP, indicating that the incorporation of debt increases a firm's core profitability.
These mixed impacts of leverage on profitability identified this study can be supported by previously published literature.Myers and Majluf (1984) advocated that there is an adverse affiliation between debt obligations and firms' profitability, and the businesses with truncated retained earnings will rely more on debt financing.There is plenty of research, which delivers evidence to prove this negative affiliation between profitability and leverage ( financial distress risk.Based on the background of emergent countries like Bangladesh, it can be seen that the incorporation of leverage in the capital structure can bring about both adverse and advantageous results.However, the find-ings can be further elaborated across multiple industries, or the models could be modified further to create more scopes of research on this never-ending argument of leverage-induced profitability.

CONCLUSION
As prudent investors must be cognizant of the financial performance of any company, the discussion over the topic of leverage and financial performance is a very crucial concern all over the world of investment.As a result, the managers of a company always endeavor to manage the leverage in a way that enhances the company's financial performance.To benefit them, the paper aimed to find the correlation of financial performance with the leverage of a firm and found that the measures of leverage used in this study have an impact on a company's financial performance.
According to findings, the key financial performance indicator Earning Per Share (EPS) has a dependency on leverage measured by the Debt-to-Asset ratio.Return on Assets (ROA) has a dependency on the Debt-to-Asset ratio and the Current Liability-to-Asset ratio.Whereas Return on Equity is dependent on the Debt-to-Equity ratio and Current Liability-to-Equity Ratio.Lastly, the indicator of Basic Earning Power (BEP) can be explained by the Debt-to-Asset ratio.
The paper put forward the facts related to leverage-induced profitability across various firms.The verdicts of this study will help financial managers and policymakers to make decisions regarding the incorporation of debt into their funding mix.Although the inquiry has demonstrated mixed verdicts for leverage-induced profitability like the previous literature, the findings have put forward the importance of balancing the ratio of leveraged finance in the capital structure to enjoy profitability in an emerging economy like Bangladesh.Future endeavors of upcoming researchers are encouraged through this study as it has set a parameter for expanding analysis on leverage-induced profitability across industries in other developing economies.
Consequently, to mitigate this issue, it was advisable for the company that, if the internal source is not adequate, then debt instruments should be issued and once it is not any more beneficial to continue taking out debt, then equity should be issued.This implies that there is an adverse relationship between debt obligations and firms' profitability, and the firms with low retained earnings will rely more on debt financing.
(1)rs and Majluf (1984)ry' was formulated and presented byMyers and Majluf (1984)who stated that due to the presence of information disparity between executives of enterprises and savers, it is conceivable that savers may underestimate the valhttp://dx.doi.org/10.21511/imfi.21(1).2024.27ue of freshly issued stock.As for identifying the variables that could interpret the dynamics of leverage-induced profitability, 'Firm performance' is used as the regressand, which was further proxied by Earnings per Share, Return on Assets, Return on Equity, and Basic Earning Power, respectively.Alternatively, proxy variables for the regressor 'Financial leverage' include Debt-to-Equity, Debt-to-Asset, Current Liability-to-Equity, and Current Liability-to-Asset.Plenty of literature could be cited behind the reasoning for such variable selection.
the listed ceramic companies in DSE from 2016-2021 while employing ROA and ROE as proxy measures of profitability.As for the regressor, Management efficiency, Capital intensity, Firm size, Sales growth, Liquidity, working capital, Leverage, Yearly inflation, and GDP annual growth were considered, although the study could not demonstrate any significant evidence of leverage-induced profitability in the ceramic sector.
27)p://dx.doi.org/10.21511/imfi.21(1).2024.27Toachieve the objective of identifying the primary factors of profitability of the ceramic companies in Bangladesh, Sharma (2022) conducted a study on all and NPM.The exogenous variables in this study included five capital structure ratios, SDTA, LDTA, TDTA, LTDCE, TDTQ, as well as the size, growth of the company, tangibility of assets, cash flows, and liquidity.Except for ROE, long-term debt, tangibility, and liquidity happened to have a negative impact on other financial performance indicators.

Table 1 .
Identification of the variables employed in the study In nd de ep pe en nd de en nt t v va ar ri ia ab bl le es s D De ep pe en nd de en nt t v va ar ri ia ab bl le es s 'Financial Performance' (EPS, ROA, ROE, BEP), β -Coefficient of the explanatory variables.it X -Indicator of the predictor variable, i.e. 'Financial Leverage' (D/E, D/A, CL/A, CL/E), it ε -Random error term, i -the number of firms employed in the analysis, and t -the number of periods used in the analysis.http://dx.doi.org/10.21511/imfi.21(1).2024.27

Table 4 .
Model 3of fixed effect analysis (dependent variable: EPS, and independent variable: Current Liability-to-Equity)

Table 10 .
Model 9of fixed effect analysis (dependent variable: ROE, and independent variable: Debt-to-Equity) 10%, implying that the independent variable of the model can predict a 21.10% variation in the dependent variable.The analysis exhibits that Debt-to-Equity and Size have a noteworthy impact on ROE at a 1% and 05% significance level, respectively.

Table 13 .
Model 12of fixed effect analysis (dependent variable: ROE, and independent variable: Current Liability-to-Asset)

Table 14 .
Model 13of fixed effect analysis (dependent variable: BEP, and independent variable: Debt-to-Equity)

Table 15 .
Model 14of fixed effect analysis (dependent variable: BEP, and independent variable: Debt-to-Asset)

Table 16 .
Model 15of fixed effect analysis (dependent variable: BEP, and independent variable: Current Liability-to-Equity)

Table 17 .
Model 16of fixed effect analysis (dependent variable: BEP, and independent variable: Current Liability-to-Asset)

Table А2 .
Multicollinearity test keeping the Debt-to-Equity ratio as the independent variable

Table А3 .
Multicollinearity test keeping the Debt-to-Asset ratio as the independent variable

Table А4 .
Multicollinearity test keeping the Current Debt to Equity ratio as the independent variable

Table А5 .
Multicollinearity test keeping the Current Debt to Asset ratio as the independent variable