Nonlinear Impact of Financial Leverage on Profits: Case of Listed Companies in Vietnam
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Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute
Asian Institute of Research, Journal Publication, Journal Academics, Education Journal, Asian Institute

Economics and Business

Quarterly Reviews

ISSN 2775-9237 (Online)

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, managemet journal
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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)

asian institute research, jeb, journal of economics and business, economics journal, accunting journal, business journal, management journal

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doi

10.31014/aior.1992.06.02.506

Pages: 33-45

Keywords: Financial Leverage, Profit, ROA, ROE, Impact

Abstract

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.

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