The effect of financial leverage on firms’ financial performance

Abdullah alkahlout
20202404043

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 i. Introduction:

In the fast-paced world of finance, accounting, business management, etc.…(1) where risks can
yield remarkable rewards or catastrophic losses, one concept has stood the test of time as both a
powerful tool and a double-edged sword: financial leverage (2). The amount that a company uses
debt and equity to finance its assets is measured by financial leverage(3) (Innocent et al., 2014).
In contrast to the owners' equity element of a company's capital structure, financial leverage is
the fraction of the latter that is made up of fixed-charge funding instruments like debt and
preference shares (Arhinful & Radmehr, 2023). For every organization, financial leverage is
essential for raising production levels, increasing shareholder value, or acquiring new assets
(Al-Slehat, 2019).
Corporate financial managers should arrange their capital structure to enhance the
firm's worth by minimizing the cost of capital (Dalci, 2018) . (4)Businesses must make this
choice carefully since managers work to determine the best debt-to-equity ratio among various
financial leverage levels (Dey et al., 2018). In both established and developing economies,
leverage has become increasingly important. It is a useful instrument for managing financial
crises(5). Paying attention to leverage could result in fewer financial crises over the course of a
century (Al Dabbas, 2023). The cost of financing through liabilities is lower for businesses(6).
also, a company that uses debt benefits because interest payments are tax-free, which could raise
the firm's worth (, 2015). Conversely, an unchecked rise in liabilities raises the danger
of default and lowers the share price (7) (finance & 2013, n.d.). An increase in debt and preferred
equity causes an increase in interest payments for the corporation, which lowers EPS(8)
(Yasmin et al., n.d.)
. Consequently, there is a higher risk to stockholder return. A business ought to When
deciding how to finance a project, keep in mind its ideal capital structure to make sure that any
increases in debt and preferred equity would raise the company's worth(9)
((SCIRJ) & 2014, 2014).
If a company is unable to meet its debt obligations, it may face bankruptcy or other
financial difficulties. Previous study(10) has extensively examined how numerous factors,
including leverage, cash flow, sales growth, and managerial ownership, impact financial distress
(Giarto & Fachrurrozie, 2020). However Leverage measures how much debt is used to finance

corporate operations(11). According to (12)pecking order theory, a larger leverage ratio indicates
Increases the company's risk of not meeting its obligations. This signals poor business financial
performance or financial distress, perhaps leading to decreased firm value (13) (Serrasqueiro et al., 2015a)

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 . The optimal use of financial leverage is a global problem that has given rise to
numerous theories, the most well-known of which are the trade-off theory and the pecking order
theory(14). The trade-off theory states that businesses should take on as much debt as possible to
optimize the benefits of debt tax shielding and reduce the likelihood of bankruptcy
(Serrasqueiro et al., 2015b)
On the other hand, the target capital structure is assumed to not exist in the pecking
order hypothesis. Companies prioritize internal finance, debt, and equity when selecting capital
(Frank et al., n.d.). Many performance metrics have been employed over time with the
understanding that they are somewhat correlated with shareholder value. Analysts, financial
managers, and according(15) to experts, typical accounting performance metrics like earnings
per share, return on assets, and dividends per share can be used to calculate a company's worth
(Heikal et al., 2014) . This study limits itself to focusing on the relationship between financial
leverage and various financial performance metrics (16) such as Return on Assets (ROA), Return
on Equity (ROE), Earnings per Share (EPS), and debt to equity ratio (DER) and this relationship
is significant and can impact the overall financial health of a company (Ali et al., 2022). In this
study we focus on the financial leverage impact on Jordanian listed companies, The Jordanian
economy is characterized by its diverse sectors, including industry, services, and agriculture(17).
It is considered one of the more stable economies in the Middle East region. Jordan's economy is
primarily driven by services, including tourism, finance, and trade. Industry, particularly
manufacturing and mining, also plays a significant role. Agriculture contributes a smaller but
still notable share to the GDP (Sadiq et al., 2023). (18) the impact of financial leverage on
Jordanian companies depends on various factors such as the company's financial management
practices, industry dynamics, economic environment, and regulatory framework. Balancing the
benefits of leverage with the associated risks is essential for sustainable growth and financial
stability. This study investigates the impact of financial leverage on firm performance in the
presence of Amman stock exchange by applying statistical tools(19) and analyzing them. The
main theme of this study is to find out that there is a link between leverage and firm’s
performance. This study answers the following questions. What is the effect of leverage on firm
performance? What is the effect of leverage on Return on Assets (ROA)? What is the effect of
leverage on Return on Equity (ROE)? What is the effect of leverage on Earnings per Share
(EPS)? What is the effect of leverage on Debt-to-Equity Ratio (DER)? And lastly how these
performance measures are related to leverage and the overall performance of the company. (20)

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This study employs correlational research design and uses Amman stock exchange to collect data
from 50 different companies from different industries. The findings of this study have important
implication for understanding the effect of leverage on financial performance. We start this
analysis by defining each financial performance metric and outlining how the financial leverage
is related to them, then try to connect all the findings into a result. Properly used financial
leverage can amplify profits for Jordanian companies. The level of the business's profitability is
one crucial metric for determining the firm's value. In terms of profitability, ROA is used. ROA
is a ratio that indicates the contribution of assets to generate net income (Husna et al., n.d.) By
using debt to finance operations or investments, companies can generate higher returns on equity
when the return on assets (ROA) exceeds the cost of debt (Issues & 2021, n.d.) .On the other hand,
Excessive financial leverage can increase the risk of financial distress for Jordanian companies,
especially during economic downturns or periods of high interest rates. Businesses with high
returns on assets will draw capitalists to contribute their money to the business. This is due to the
fact that a high Return on Asset indicates improving stock performance; that is, as stock prices
rise, therefore Returns on stocks will rise as well (Management & 2021, 2021). Return on equity is
one of the primary metrics that a business releases each year. Return on equity measures how
well the company uses its own money, hence its level is largely significant to shareholders, who
can use it to gauge whether the compensation they receive justifies the risk they took
(Circiumaru et al., 2019). The debt-to-equity ratio is a financial metric used to evaluate a
company's financial leverage by comparing its total debt to its total equity. The debt-to-equity
ratio provides insights into how much debt a company is using to finance its operations relative
to the amount of equity it has. A high debt-to-equity ratio indicates that a company relies heavily
on debt financing, while a low ratio suggests that it primarily uses equity financing
(Nuryani et al., 2020).
If a company is unable to meet its debt obligations, it may face bankruptcy or other
financial difficulties. Previous study has extensively examined how numerous factors, including
leverage, cash flow, sales growth, and managerial ownership, impact financial distress
(Giarto & Fachrurrozie, 2020).
However Leverage measures how much debt is used to finance corporate
operations. According to pecking order theory, a larger leverage ratio indicates Increases the
company's risk of not meeting its obligations. This signals poor business financial performance
or financial distress, perhaps leading to decreased firm value (Serrasqueiro et al., 2015a) . The
optimal use of financial leverage is a global problem that has given rise to numerous theories, the

4
 most well-known of which are the trade-off theory and the pecking order theory. The trade-off
theory states that businesses should take on as much debt as possible to optimize the benefits of
debt tax shielding and reduce the likelihood of bankruptcy (Serrasqueiro et al., 2015b) On the
other hand, the target capital structure is assumed to not exist in the pecking order hypothesis.
Companies prioritize internal finance, debt, and equity when selecting capital (Frank et al., n.d.).
These two theories are directly related to capital structure. The majority of empirical data on
capital structure originates from research on the factors that influence corporate debt ratios and
the debt-to-equity ratio of issuing corporations’ choice of finance (Klein et al., 2001) .(21) This
thesis is organized into five chapters. Chapter 1 provides an introduction to the research question,
objectives, and significance of the study. Chapter 2 provides a comprehensive review of the
relevant literature on the topic, identifying gaps in the literature that this study aims to address.
Chapter 3 outlines the research methodology, including the research design, sampling strategy,
data collection and analysis methods. Chapter 4 presents the findings of the study, with a focus
on the relationship between financial leverage and firm performance in Jordan companies.
Chapter 5 provides a summary of the main findings, implications for future research, and
recommendations for practitioners and policymakers.

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Notes :
1. choose one aspect only, and do not use “etc.” in a research paper
2. is there a reference for this statement ?

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3. if this is a definition then state that it’s a definition !
4. these statements are informative, but do not tell a story, work on your linkage !!!
5. again I find no link, or if it is there then it is not apparent !
6. please explain the structure of your argument better
7. double check this reference !
8. double check reference
9. double check reference
10. plural
11. broken sentence (missing meaning)
12. add “the” , and use a software (Grammarly) for grammar please !
13. again valuable information, poor structure !
14. you already mentioned this before, right ???
15. sentence structure issue !
16. do not focus on the metrics of evaluation in the introduction, rather focus on the concept of
“performance” itself !
17. add reference !
18. only add what is relevant, do not write for the sake of increasing the word count !
19. delay this part !
20. too many questions, will lead to many hypothesizes, focus only on one question, make it
about performance, and latter on in the methodology we will write about the measure of
performance !
21. these are your findings; how did you reach them so early ???
22. final note : your facts are impressive, you have some minor issues in grammar and citations,
but the biggest issue is in the structure, I would advise you on imitating the style used in the BT
guidelines for a better clearer structure!