The effect of financial leverage on the firm’s performance

Abstract

This research set out to investigate the impact of financial leverage on firm performance of the food and beverage sector companies listed in the Egyptian stock market exchange .The financial leverage measurements are debt ratio and debt to equity ratio, firm’s performance measurements which are free cash flow and Tobin’s Q. The researchers are going to examine whether there is a positive or a negative relationship between the two variables and if it is significant or not significant relationship. It took performance measures in a wider perspective using Free Cash Flow and Tobin’s Q. In addition to financial leverage the study expanded its explanatory variables by controlling for debt ratio, and debt to equity. The results revealed that there is a significant negative relationship between leverage and free cash flow. Findings from the Tobin’s Q model indicated that large firms have a negative insignificant relationship between financial leverage and firm performance while the older firms showed an increase in its market value; this is an indication of investors’ confidence on the older firms who have built their reputation over a long period.