The Impact of Financial Leverage on Firm Performance – Based on the Moderating Role of Operating Leverage

DOI

10.2991/aebmr.k.201211.079How to use a DOI?

Keywords

Capital structure, firm performance, operating leverage, moderating role

Abstract

Risks and returns are two key considerations while firms make decision. Since Chinese economic environment is becoming more open, the diversity of finance is promoted; therefore, the studies on the impact of capital structure on firm operation and corresponding solutions are significant. There have been several researches focusing on this topic to find out the relationship between financial leverage and firm performance. This paper uses a sample of Chinese listed companies covering the period 2010-2019, to study the impact of financial leverage on firm performance, measured by return on assets (ROA). By using OLS and 2SLS methods to take linear regression, this research shows that the relationship between financial leverage and firm performance is significantly negative, while operating leverage positively moderates this relationship. In addition, by further researches, this study shows that the moderating role of operating leverage could be insignificant in real estate industry. This research is of certain significance for enterprises’ financing decision-making and risk management. It suggests that high debts are harmful to a firm’s performance, since it could introduce extra financial risks and agency costs; nonetheless, control the selling, general and administrative expense could be a good way to solve this problem. Based on all the researches above, some suggestions come up: Firstly, firms should maintain a proper capital structure. Moreover, management could adjust operating leverage to release the negative consequence of debt. Finally, real estate enterprises could afford higher financial leverage than other enterprises. At the end of this paper, the limitations of this paper are listed, and suggestions for future researches are put forward.

Copyright

© 2020, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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TY  - CONF
AU  - Haomin Chen
PY  - 2020
DA  - 2020/12/14
TI  - The Impact of Financial Leverage on Firm Performance – Based on the Moderating Role of Operating Leverage
BT  - Proceedings of the Fifth International Conference on Economic and Business Management (FEBM 2020)
PB  - Atlantis Press
SP  - 464
EP  - 473
SN  - 2352-5428
UR  - https://doi.org/10.2991/aebmr.k.201211.079
DO  - 10.2991/aebmr.k.201211.079
ID  - Chen2020
ER  -