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Wrońska-Bukalska Elżbieta (Maria Curie-Sklodowska University in Lublin, Poland), Radman-Pesa Anna (University of Zadar, Poland)
The Relation Between Profitability and Leverage for Polish Companies During a Financial Crisis
Business and Non-profit Organizations Facing Increased Competition and Growing Customers' Demands, 2018, vol. 17, s. 645-661, tab., bibliogr. 46 poz.
Dźwignia finansowa, Rentowność, Kryzys finansowy
Financial leverage, Profitability, Financial crisis
The paper refers to the problem of the relationship between profitability and leverage. This is a major part of any capital structure decision. The aim of the paper is to identify whether the relationship between profitability and leverage is positive or negative. It must be noted that the trade-off theory assumes a positive relation, while pecking order theory assumes a negative relation. We also assume that because of financial crisis specificities, declining profitability will be accompanied by declining leverage. In our work, to identify the relation, we employed correlation coefficient techniques. Moreover, to model the relation, we utilized univariate regression analysis. Furthermore, we conducted three levels of analysis: for aggregated data of the companies of the whole Polish economy, for firm-level data of companies listed on WSE and for firm-level data of panel companies listed on WSE. Our analysis covers the period of 2005-2016. We found positive relationships between ROE and leverage and negative relationships between leverage and ROA. We think that these relations might be explained by the effects of financial leverage and the fact that the owners' rate of return (ROE) is higher than the cost of debt. The originality of our research lies in including different measures of profitability (esp. ROA and ROE) and the effects of financial leverage (EFL) as the explanation for the inconsistency in research on the relation between profitability and leverage. Our results are an important contribution to a debate on the relationship between profitability and leverage, and might explain both positive and negative interaction by connecting this relation with the effects of financial leverage and the relation between cost of capital and the rate of return. (original abstract)
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