Impact of Gearing on Performance of Companies

Siyanbola, Trimisiu Tunji; Olaoye, Samuel Adebayo; Olurin, Oluwatoyosi Tolulope

doi:10.12816/0011650

Cited by 4 publications

(12 citation statements)

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“…Linsley and Shrives (2006) pointed out the gearing ratio as a measure of financial risk. Briston (1981) revealed an inverted relationship between the gearing ratio and companies' profitability whereas Akhtar et al (2011) and Siyanbola et al (2015) found a positive effect of gearing ratio on financial performance from their study on Nigerian companies. However, Enekwe et al (2014) showed a negative relationship between the gearing ratio (debt-to-equity ratio) and the return on assets in six pharmaceutical companies in Nigeria from 2001 to 2012.…”

Section: Gearing Ratiomentioning

confidence: 90%

“…The authors revealed that market risk indicators had significant adverse effects on return on equity. Other studies have used different measures of market risk and control variables to analyze the relationship between financial risks and financial performance (Dempsey 2010;Siyanbola et al 2015;Wani and Dar 2015;Muriithi et al 2016; among others).…”

Section: Literature Review and Testable Hypothesesmentioning

confidence: 99%

“…We alternatively employed three (03) measures of financial performance widely used in previous studies (Abdellahi et al 2017;Badawi 2017), namely, return on assets, return on equity and profit margin. Then, this study utilized a measure of the degree of financial leverage (Dimisyqiyani et al 2015;Muriithi et al 2016), the book-to-market ratio (Fama and French 1993;Dempsey 2010;Cakici and Topyan 2014) and the gearing ratio (Briston 1981;Akhtar et al 2011;Siyanbola et al 2015) as indicators of market risk. Finally, we added seven control variables that influence firms' financial performance, including the firm age (Ilaboya and Ohiokha 2016; Akben-Selcuk 2016; Pervan et al 2017), the cash holdings ratio (Akinyomi 2014;Bhutto et al 2015), the debt-to-income ratio (Fout et al 2018), the debt-to-assets ratio (Gill and Obradovich 2012; Zelgalve and Berzkalne 2015), firm size (Jang and Park 2011; Al-Najjar 2014), the tangibility ratio (Okwo et al 2012;Azadi 2013) and stock turnover (Khan et al 2016;Nawaz et al 2016).…”

Section: Description Of Variablesmentioning

confidence: 99%

“…In this section, we first employed a modified static model following previous empirical studies using three alternative measures of financial performance (Siyanbola et al 2015;Zelgalve and Berzkalne 2015;Muriithi et al 2016;Admassu 2016;Abdellahi et al 2017; among others) and taking into account the issue of non-stationary variables:…”

Section: Model Specificationmentioning

confidence: 99%

“…According to Koch and MacDonald (2006), market risk mainly includes foreign exchange risk, interest rate risk, commodity price risk and stock price risk, referring to adverse changes in exchange rate, interest rate, and stock prices. Some studies have used alternative measures of market risk, such as the book-to-market ratio (Fama and French 1993;Chen et al 2005;Dempsey 2010;Cakici and Topyan 2014), the gearing ratio (Briston 1981;Akhtar et al 2011;Siyanbola et al 2015) and the degree of financial leverage (Abid and Mseddi 2004;Gatsi et al 2013;Muriithi et al 2016). These studies found that market risk had a significant effect on a firm's financial performance.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Market Risk and Financial Performance of Non-Financial Companies Listed on the Moroccan Stock Exchange

Kassi

Rathnayake

Louembé

et al. 2019

Risks

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This study examines the effect of market risk on the financial performance of 31 non-financial companies listed on the Casablanca Stock Exchange (CSE) over the period 2000–2016. We utilized three alternative variables to assess financial performance, namely, the return on assets, the return on equity and the profit margin. We used the degree of financial leverage, the book-to-market ratio, and the gearing ratio as the indicators of market risk. Then, we employed the pooled OLS model, the fixed effects model, the random effects model, the difference-GMM and the system-GMM models. The results show that the different measures of market risk have significant negative influences on the companies’ financial performance. The elasticities are greater following the degree of financial leverage compared with the book-to-market ratio and the gearing ratio. In most cases, the firm’s age, the cash holdings ratio, the firm’s size, the debt-to-assets ratio, and the tangibility ratio have positive effects on financial performance, whereas the debt-to-income ratio and the stock turnover hurt the performance of these non-financial companies. Therefore, decision-makers and managers should mitigate market risk through appropriate strategies of risk management, such as derivatives and insurance techniques.

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Section: Gearing Ratiomentioning

confidence: 90%

Section: Literature Review and Testable Hypothesesmentioning

confidence: 99%

Section: Description Of Variablesmentioning

confidence: 99%

Section: Model Specificationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Market Risk and Financial Performance of Non-Financial Companies Listed on the Moroccan Stock Exchange

Kassi

Rathnayake

Louembé

et al. 2019

Risks

View full text Add to dashboard Cite

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Market Risk and Financial Performance of Non-financial Companies Listed on the Moroccan Stock Exchange

Kassi¹,

Rathnayake²,

Edjoukou³

2019

Preprint

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This study examines the effect of market risk on the financial performance of 31 non-financial companies listed on the Casablanca Stock Exchange (CSE) over the period 2000-2016. We utilize three alternative variables to assess financial performance, namely return on assets, return on equity and profit margin. Next, we use the degree of financial leverage, the book-to-market ratio, and the gearing ratio as market risk variables. Besides, we employ the pooled OLS model, the fixed effects model, the random-effects model, the difference GMM and the system GMM models. The results show that market risk indicators have a negative and significant influence on the companies' financial performance. The elasticities are greater following the book-to-market ratio compared to the degree of financial leverage and the gearing ratio, respectively. In most cases, the firm size, the tangibility ratio, and the cash holdings ratio have a positive effect on financial performance, whereas the firms' age, the debt-to-income ratio, stock turnover, and leverage hurt the performance of these non-financial companies. Therefore, decision-makers and managers should mitigate market risk through appropriate strategies of risk management, such as derivatives and insurance techniques.

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The Effect of Capital Structure Gearing Levels on Financial Performance of Public and Private Sector Firms in Kenya’s Coastal Counties

Yusuf¹,

Mwakubo²,

Abdallah³

2019

IJEF

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Soon after independence in 1963, many firms including those in productive public and private sectors were set up in Kenya to produce goods and services for consumption in Kenya and beyond. Some public and private firms were set up in Kenya’s coastal counties while some were set up in other parts of Kenya. As at June 1990 however, most of these firms were either collapsed and liquidated or were ailing. Few were performing fairly. By 2015, there were 194 public firms which were in operations. Many of these however were formed after 1990. 46.4% of these had poor financial performance as measured by accounting and market ratios (ROE and ROA). About 35 of these firms, among them sugar firms and local authorities had more operating expenses than revenue. Postal Corporation of Kenya for example made KES 2.6b in revenues. Operating expenses however were KES 4.16b. National Oil Corporation of Kenya (NOCK) made KES 24.76b in revenues. Cost of sales excluding operating expenses however were KES 22.95b (Kenya’s treasury department, statement, 2015). In the small enterprise segment, about 300,000 SME’s were set up in 2010. About 350,000 SME’s were set up in 2012. However 2.2m SME’s closed down in six years ending 2015. About 35% of these closed down in 2015. Overall, about 96% of the firms which are set up closed down by the end of their first year in operations. (World Bank Report, 2010). The questions were ‘why did firms underperform and why did these firms fail?’ Published annual financial reports of firms, studies by Kenya National Bureau of Statistic (KNBS) and others attributed the poor financial performance and failure of the firms to many factors; high cost of energy, intense competition, high cost of raw materials, obsolete equipment, poor management, poor technical skills, high cost of finance and other bank charges, inadequate finance, family feuds, lack of succession plan etc. Some empirical studies attributed poor financial performance and failure of firms to financing; the capital structure. None however attributed this to capital structure gearing levels. This constituted a research gap to be filled by this study to add to the body of knowledge and literature. The capital structure gearing level is the proportion of external finance used in financing a firm. This proportion (gearing) may vary between &rsaquo;0 to 100% (Brealey & Myers, 1991). Some firms however have a proportion ranging between &rsaquo;0 and <30% (LG), 30%-&lsaquo;35% (MG1) ≥35%-&lsaquo;40% (MG2) ≥40%-≤60% (MG3) and &rsaquo;60% (HG). The external finance may be inform of short term and long term debt and equity finance. Debt carries a fixed slice of earnings. The gearing levels therefore debt levels will carry a proportionate fixed slice of earnings. High gearing (HG) will magnify the effect on earnings and hasten the process of insolvency (Brealey & Myers, 1991). Poor financial performance and failure therefore maybe the result of inappropriate gearing level. Gearing level therefore was the problem. This study sought to do the following: Assess the capital structure of public and the private sector firms in Kenya’s coastal counties. Assess the capital structure gearing levels of public and private sector firms in Kenya’s coastal counties. Determine the effect of the capital structure gearing levels on financial performance of public and private sector firms in Kenya’s coastal counties. This involved a target population of 500 productive firms in Kenya’s Coastal Counties. Using the Cochran’s sample size formula, 50% proportion of the productive public and private sector firms randomly selected, the sample was 139 firms. They were observed for a period of 2003 to 2015. Questionnaires and structured interviews were used as instruments for collecting primary data from finance officers or finance managers or their equivalent of the firms. Secondary data was obtained from financial statements (income statement and the balance sheet). Control variables were; size, tangibility and growth. The basic framework for regression was of the form below; Y= f (gearing levels+ tangibility+ size+ growth) Where, Y= return on assets/return on equity ROA/ROE=f (gearing levels+ tangibility+ size+ growth) Data analysis was done using both descriptive statistics and inferential statistics (regression).

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Impact of Gearing on Performance of Companies

Cited by 4 publications

References 0 publications

Market Risk and Financial Performance of Non-Financial Companies Listed on the Moroccan Stock Exchange

Market Risk and Financial Performance of Non-Financial Companies Listed on the Moroccan Stock Exchange

Market Risk and Financial Performance of Non-financial Companies Listed on the Moroccan Stock Exchange

The Effect of Capital Structure Gearing Levels on Financial Performance of Public and Private Sector Firms in Kenya’s Coastal Counties

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