| Title : | Financial leverage and firm performance : a case of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Manish Bhattarai, Author | | Publication Date: | 2015 | | Pagination: | 102p. | | Size: | GRP/Thesis | | Accompanying material: | 5/B | | General note: | Including bibilography | | Languages : | English | | Descriptors: | Business - Mathematical models
Capital market
Capital-Mathematical models
Leveraged buyouts
Nepal
| | Keywords: | 'financial leverage capital adequacy ratio debt to assets ratio return on assets return on equity liquidity' | | Class number: | 658.152 | | Abstract: | Financial decisions are taken in different paradigms of investment, financing, asset management and dividend policy. Investment decision is mainly concerned with three areas either the manager has to take decision about opening a new venture, or decision may be specific to expansion of current business venture and it may be to replace current assets or machinery.Once the investment decision is done, another most important decision is to how to finance in the investment. Firms mainly finance either from internal or from external sources. Firms internally finance from retained earnings whereas external source for firms is to either borrow or to finance through equity. Thus, the mix of debt and equity in financing is known as financial leverage. In another word, financial leverage represents a firm’s financial framework which consists of the debt and equity used to finance the firm.
An unlevered firm is an all-equity firm, whereas a levered firm is made up of ownership equity and debt. Financial leverage takes the form of a loan or other borrowing (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. Financial leverage allows a greater potential returns to the investors than otherwise would have been available, but the potential loss is also greater: if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid.
Financial leverage has always been one of themain topics among the studies of finance scholars.Its importance derives from the fact that capitalstructure is tightly related to firm’s performance tofulfill the needs of various stakeholders. The lastcentury has witnessed a continuous developing ofnew theories on the optimal debt to equity ratio. Thefirst milestone on the issue was set by Modiglianiand Miller (1958), whose model argued on the irrelevance of the capital structure in determining firms’ value and performance.This study attempts to shed some light on the financial leverage issues in Nepalese context. The main issue is to analyze impact of financial leverage on firm’s performance in context of Nepalese commercial banks.
The data collected for the study are quantitative and based on fact. The quantitative data were taken from different secondary sources.Data were obtained from financial statements of 16 sample commercial banks. The necessary financial statements have been collected from official website of concern commercial banks, Nepal Stock Exchange Limited (NEPSE), Security Board of Nepal (SEBON), and Nepal Rastra Bank (NRB). This study collected financial statements of sampled commercial banks for the period of eleven years. (i.e. July 2002/03 to July 2012/13).Data of variables were extracted from balance sheet, and income statement of respective banks. Financial leverage and control variables namely firm size, non interest income, liquidity and capital adequacy ratio has been used as independent variables whereas return on assets, return on equity and net interest margin has been used as proxy for firm performance as dependent variable. Descriptive statistics and correlation analysis has been used as method of analysis along with different statistical tests of significance for validation of model such as t-test, F-test, detection of autocorrelation and multi-colinearity and stepwise linear regression analysis.
After the data analysis, the result was found that the financial leverage effect negatively to firm performance. The presence of control variables also showed no effect in direction of relationship whereas only magnitude of relationship between financial leverage and firm performance was observed to be changed. Thus, the study concludes that to increase performance, firms need to decrease financial leverage.
Recommendation discussed includes:
 To increase performance of firm, firm need to decrease financial leverage.
 Firm need to decrease size i.e., total assets to increase firm performance.
 Non-interest income and capital adequacy ratio need to be increased for the betterment of firm performance.
The report also investigates the fact that the analysis conducted has limitations. Some of the limitations include: sample firms are only taken from commercial banks sector and other non-financial firms has not been used in study, only 16 out of 31 commercial banks has been used as sample due to availability of data and the study has assumed the linear relationship between dependent and independent variables and non-linear assumption has not been used in analysis. |
Financial leverage and firm performance : a case of Nepalese commercial banks [printed text] / Manish Bhattarai, Author . - 2015 . - 102p. ; GRP/Thesis + 5/B. Including bibilography Languages : English | Descriptors: | Business - Mathematical models
Capital market
Capital-Mathematical models
Leveraged buyouts
Nepal
| | Keywords: | 'financial leverage capital adequacy ratio debt to assets ratio return on assets return on equity liquidity' | | Class number: | 658.152 | | Abstract: | Financial decisions are taken in different paradigms of investment, financing, asset management and dividend policy. Investment decision is mainly concerned with three areas either the manager has to take decision about opening a new venture, or decision may be specific to expansion of current business venture and it may be to replace current assets or machinery.Once the investment decision is done, another most important decision is to how to finance in the investment. Firms mainly finance either from internal or from external sources. Firms internally finance from retained earnings whereas external source for firms is to either borrow or to finance through equity. Thus, the mix of debt and equity in financing is known as financial leverage. In another word, financial leverage represents a firm’s financial framework which consists of the debt and equity used to finance the firm.
An unlevered firm is an all-equity firm, whereas a levered firm is made up of ownership equity and debt. Financial leverage takes the form of a loan or other borrowing (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. Financial leverage allows a greater potential returns to the investors than otherwise would have been available, but the potential loss is also greater: if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid.
Financial leverage has always been one of themain topics among the studies of finance scholars.Its importance derives from the fact that capitalstructure is tightly related to firm’s performance tofulfill the needs of various stakeholders. The lastcentury has witnessed a continuous developing ofnew theories on the optimal debt to equity ratio. Thefirst milestone on the issue was set by Modiglianiand Miller (1958), whose model argued on the irrelevance of the capital structure in determining firms’ value and performance.This study attempts to shed some light on the financial leverage issues in Nepalese context. The main issue is to analyze impact of financial leverage on firm’s performance in context of Nepalese commercial banks.
The data collected for the study are quantitative and based on fact. The quantitative data were taken from different secondary sources.Data were obtained from financial statements of 16 sample commercial banks. The necessary financial statements have been collected from official website of concern commercial banks, Nepal Stock Exchange Limited (NEPSE), Security Board of Nepal (SEBON), and Nepal Rastra Bank (NRB). This study collected financial statements of sampled commercial banks for the period of eleven years. (i.e. July 2002/03 to July 2012/13).Data of variables were extracted from balance sheet, and income statement of respective banks. Financial leverage and control variables namely firm size, non interest income, liquidity and capital adequacy ratio has been used as independent variables whereas return on assets, return on equity and net interest margin has been used as proxy for firm performance as dependent variable. Descriptive statistics and correlation analysis has been used as method of analysis along with different statistical tests of significance for validation of model such as t-test, F-test, detection of autocorrelation and multi-colinearity and stepwise linear regression analysis.
After the data analysis, the result was found that the financial leverage effect negatively to firm performance. The presence of control variables also showed no effect in direction of relationship whereas only magnitude of relationship between financial leverage and firm performance was observed to be changed. Thus, the study concludes that to increase performance, firms need to decrease financial leverage.
Recommendation discussed includes:
 To increase performance of firm, firm need to decrease financial leverage.
 Firm need to decrease size i.e., total assets to increase firm performance.
 Non-interest income and capital adequacy ratio need to be increased for the betterment of firm performance.
The report also investigates the fact that the analysis conducted has limitations. Some of the limitations include: sample firms are only taken from commercial banks sector and other non-financial firms has not been used in study, only 16 out of 31 commercial banks has been used as sample due to availability of data and the study has assumed the linear relationship between dependent and independent variables and non-linear assumption has not been used in analysis. |
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