Citation:

Valentine Ogudo, Ebunoluwa Adejumo, Mary Omotosho. "Financial Leverage and Shareholders Returns: Evidence from Selected African Multinational Entities" International Research Journal of Economics and Management Studies, Vol. 2, No. 3, pp. 142-153, 2023.

Abstract:

The effect of leverage finance on shareholder returns is investigated. It helps shareholders feel more confident that the company's management is maximizing profits and minimizing risks as intended. The net income to shareholder capital ratio is used as a proxy for the four hypotheses examined. Eleven publicly traded companies were chosen to represent the preCOVID era from 2010-2017. In contrast to the dynamic panel, the pooled regression, fixed effect, and random effect models were used to achieve this conclusion. The endogeneity of the predictor variables was examined using the Hausman Test. The study's results were consistent with the prevalent theoretical model. Shareholders' return because of equity financing vs debt financing was found to vary across industries. Both debt and equity finance have substantial and beneficial effects on manufacturing companies. However, only equity financing has a major impact on insurers. The size of the firms is found to have a beneficial and significant effect on manufacturers and insurers. However, the findings indicate that AGE has a negative impact on shareholder return for manufacturing enterprises. However, the outcome is substantial and good for insurance providers. The research concludes that financial decision-makers should exercise caution when using leverage finance to fund their activities, even though doing so boosts shareholders' returns.

References:

[1] Akujuobi, A.B.C (2003). Accessing the returns of capital investments: “The arbitrage pricing theory approach. Journal of Research in National Development, 1(2), 67-78.
[2] Babenko, I. (2003). Optimal capital structure of the firm in the presence of costs of financial distress. University of California at Berkeley, EFA 2004 Maastricht Meetings Paper, 1(1), 67-79.
[3] Chandrakumarmangalam, S. (2010). Leverage: An analysis and its impact on the profitability with reference to selected companies in India. European Journal of Economics, Finance and Administrative Sciences, 2(4), 100-118.
[4] Chowdhury, S.P (2010). Impact of capital structure on firms’ value: Evidence from Bangladesh. Business and Economic Horizons, 3(3), 111-122.
[5] Ebiringa, O.T. and Chigbu E.E. (2012). Analysis of effect of financing leverage on bank performance: Evidence from Nigeria. Journal of Public Administration and Governance, 2(4), 82-99.
[6] Hennessy, C. and Whited, T. (2004). How costly is external financing? Evidence from structural estimation. Forthcoming journal of finance, 11(1), 57- 64.
[7] Jou, D.G. (1999). Interest rate risk, surplus, leverage and market reward: An empirical study of Taiwan life insurance industry. Journal of Management and Systems, 6(3), 281-300.
[8] Leland, H. and Pyle, H. (1998). Informational Asymmetries, financial structure, and financial intermediation. Journal of Finance, 32(2), 371-387.
[9] MacKinnon, J.G. (2012). Numerical distribution functions for unit root and co-integration tests. Journal of Applied Econometrics, 11(1), 601-618.
[10] Messbacher, U. (2004). Does capital structure influence firms’ value? Asian Journal of Management Research, 2(2), 31-48.
[11] Miller, M., and F. Modigliani, (1958). The cost of capital, corporation, finance, and the theory of investment. American Economic Review, 48(1), 261- 297.
[12] Modigliani, F. and Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(1), 433-443.
[13] Modigliani, F. and Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48(1), 261-297.
[14] Myers, S.C. and Majluf, N.S. (2003). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(1), 187-221
[15] Myers, S. (2003). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-75.
[16] Ogudo, V., & Afolabi, B. (2018). Non-Performing Loans and Banks’ Performance in Nigeria: Evidence from First Bank Nigeria Plc. Journal of Economics and Business, 1(1), 107-119.
[17] Ojo, A.S. (2012). The effect of financial leverage on corporate performance of some selected companies in Nigeria. Canadian Social Science, 8(1), 85- 91.
[18] Pandy, I.M. (2008). Financial management, Journal of Intellectual Capital, 9(2), 12-42.

Keywords:

Financial leverage, pooled regression, shareholders return.