Leverage-induced profitability in Bangladeshi firms: An empirical analysis

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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 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. 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.

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    • Figure 1. Theoretical structure
    • Table 1. Identification of the variables employed in the study
    • Table 2. Model 1 of fixed effect analysis (dependent variable: EPS, and independent variable: Debt-to-Equity)
    • Table 3. Model 2 of fixed effect analysis (dependent variable: EPS, and independent variable: Debt-to-Asset)
    • Table 4. Model 3 of fixed effect analysis (dependent variable: EPS, and independent variable: Current Liability-to-Equity)
    • Table 5. Model 4 of fixed effect analysis (dependent variable: EPS, and independent variable: Current Liability-to-Asset)
    • Table 6. Model 5 of fixed effect analysis (dependent variable: ROA, and independent variable: Debt-to-Equity)
    • Table 7. Model 6 of fixed effect analysis (dependent variable: ROA, and independent variable: Debt-to-Asset)
    • Table 8. Model 7 of fixed effect analysis (dependent variable: ROA, and independent variable: Current Liability-to-Equity)
    • Table 9. Model 8 of fixed effect analysis (dependent variable: ROA, and independent variable: Current Liability-to-Asset)
    • Table 10. Model 9 of fixed effect analysis (dependent variable: ROE, and independent variable: Debt-to-Equity)
    • Table 11. Model 10 of fixed effect analysis (dependent variable: ROE, and independent variable: Debt-to-Asset)
    • Table 12. Model 11 of fixed effect analysis (dependent variable: ROE, and independent variable: Current Liability-to-Equity)
    • Table 13. Model 12 of fixed effect analysis (dependent variable: ROE, and independent variable: Current Liability-to-Asset)
    • Table 14. Model 13 of fixed effect analysis (dependent variable: BEP, and independent variable: Debt-to-Equity)
    • Table 15. Model 14 of fixed effect analysis (dependent variable: BEP, and independent variable: Debt-to-Asset)
    • Table 16. Model 15 of fixed effect analysis (dependent variable: BEP, and independent variable: Current Liability-to-Equity)
    • Table 17. Model 16 of fixed effect analysis (dependent variable: BEP, and independent variable: Current Liability-to-Asset)
    • Table А1. Specification of the models employed in the study
    • 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
    • Conceptualization
      Ummay Mahima Ima, Maliha Rabeta
    • Data curation
      Ummay Mahima Ima, Maliha Rabeta
    • Formal Analysis
      Ummay Mahima Ima, Maliha Rabeta, Nurun Nahar
    • Investigation
      Ummay Mahima Ima, Maliha Rabeta
    • Project administration
      Ummay Mahima Ima
    • Resources
      Ummay Mahima Ima, Maliha Rabeta, Nurun Nahar, Mst. Sharmin Sultana Sumi
    • Software
      Ummay Mahima Ima, Nurun Nahar
    • Supervision
      Ummay Mahima Ima, Mst. Sharmin Sultana Sumi
    • Validation
      Ummay Mahima Ima, Mst. Sharmin Sultana Sumi
    • Writing – original draft
      Ummay Mahima Ima, Maliha Rabeta, Nurun Nahar
    • Visualization
      Maliha Rabeta, Nurun Nahar, Mst. Sharmin Sultana Sumi
    • Writing – review & editing
      Maliha Rabeta, Mst. Sharmin Sultana Sumi
    • Methodology
      Nurun Nahar