Economics and Business
ISSN 2775-9237 (Online)
Published: 26 May 2023
Nonlinear Impact of Financial Leverage on Profits: Case of Listed Companies in Vietnam
Bui Thi Ngoc, Pham Kieu Trang
University of Labour and Social Affairs (Vietnam), National Economics University (Vietnam)
Download Full-Text Pdf
Keywords: Financial Leverage, Profit, ROA, ROE, Impact
The aim of the article is to show the nonlinear impact of financial leverage on the profitability of companies listed on the Vietnamese stock market. Thereby, the author determines the threshold of each leverage with the goal of maximizing profit. The research sample includes 8,459 observations from 769 listed companies in Vietnam, period 2012-2022. The GLS estimation results confirm that financial leverage has a nonlinear effect on profitability in the form of an inverted U. On the basis of the estimated coefficients of the nonlinear function, the author uses the derivative method and determines the financial leverage threshold represented by a debt coefficient of 58.6% for ROA and 62.9% for ROE. At this threshold ROA peaks at 0.132 and ROE peaks at 0.163. In addition, the author also finds explanations for profitability by other factors such as firm size, level of tangible fixed asset investment and firm's liquidity. The research results provide useful information for financial managers at companies and other entities that can be referenced to make relevant decisions. In addition, the author gives some recommendations for listed companies, investors, business leaders and policy makers in choosing a reasonable capital structure for enterprises.
Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. Journal of Risk Finance, 6, 438–447.
Agburuga, I. U., & Ibanichuka, E. A. L.(2016). The predictive ability of corporate profitabiliy components and future earnings. European Journal of Accounting Auditing and Finance Research, 4 (11), 1-12.
Anderson, R. C., & Reeb, D. M. (2003). Founding‐family ownership and firm performance: evidence from the S&P 500. The journal of finance, 58(3), 1301-1328. https://doi.org/10.1111/1540-6261.00567
Chang, S. J. (2003). Ownership structure, expropriation, and performance of group-affiliated companies in Korea. Academy of Management Journal, 46(2), 238-253. https://doi.org/10.5465/30040617
Chen, H. (2020, December). The Impact of Financial Leverage on Firm Performance–Based on the Moderating Role of Operating Leverage. In Fifth International Conference on Economic and Business Management (FEBM 2020) (pp. 464-473). Atlantis Press.
Chowdhury, A., & Chowdhury, S. P. (2010). Impact of capital structure on firm's value: Evidence from Bangladesh. Business & Economic Horizons, 3(3).
Durand, D. (1952, January). Costs of debt and equity funds for business: trends and problems of measurement. In Conference on research in business finance (pp. 215-262). NBER.
Gujarati, D. N. (2008). Basic Econometrics (5th Edition). McGraw-Hill Education.
Habib, S. (2014). Impact of Financial and Operating Leverages on firm’s profitability: A Case study of consumer product companies in Pakistan. KASBIT Business Journals (KBJ), 7 (2), 47-63.
Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E. & Tatham, R. L. (2006). Multivirate Data Analysis. New Jersey: Pearson Education Inc.
Kumar, D. M. (2014). An empirical study in relationship between leverage and profitability in Bata India limited. International Journal of Advance Research in Computer Science and Management Studies, 2 (5), 1-9.
Mavromatti, A., Kontogeorgos, A., & Chatzitheodoridis, F. (2021). Greek Fish Farming: Measuring Profitability and Efficiency of the Sector at the peak of Economic Crisis. WSEAS Transactions on Business and Economics, 18, 1272-1279.
Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48 (3), 261-297.
Patel, J. B. (2014). Impact of leverage on profitability: a study of Sabar dairy. International Multidisciplinary Research Journal, 1 (3), 1-6.
Pavan Kumar, S. S. (2017). Leverage Analyses and Its Impact on Profitability of JSW Steels Ltd., - A Study. International Journal of Management and Social Science Research Review, 1 (35), 163-168.
Sen, G., & Ranjan, R. (2018). Rapport between Leverage and Profitability: A Study of TVS Motor Company. Journal of Finance and Accounting, 6 (2), 49-55.
Shahzad, K., Anwar, Z., & Hussain, T.(2016). Leverages Effect on Profitability: A Case of Cement Sector of Pakistan. Financial Management, 96, 41817-41820.
Silambarasan, D., & Azhagaiah, R. (2015). The Impact of Corporate Leverage on Profitability: Evidence from IT Industry in India. Pacific Business Review International, 8 (4), 44-48.
Susmel, R. (2015). Panel Data Models, Lecture 15, Ph.D. Econometrics I Course, University of Houston.
Tayyaba, K. (2013). Leverage - An Analysis and Its Impact on Profitability with Reference to Selected Oil and Gas Companies. International Journal of Business and Management Invention, 2 (7), 50-59.
Van Horne, J. C., & Wachowicz, Jr J. M.(2008). Fundamentals of Financial Management (13th edition). Prentice Hall (England).
Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value?. Journal of financial Economics, 80(2), 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005
Wieczorek-Kosmala, M., Blach, J., &Gorze´n-Mitka, I. (2021). Does Capital Structure Drive Profitability in the Energy Sector?. Energies, 14, 4803, 1-15.
Yang, J. A., Chou, S. R., Cheng, H. C., & Lee, C. H. (2010). The effects of capital structure on firm performance in the Taiwan 50 and Taiwan mid-cap 100. Journal of Statistics and Management Systems, 13(5), 1069-1078.