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The Impact of Financial Leverage on a Company’s Market Valuation

Finanse i Prawo Finansowe, 2021-09 (1), p.199-214 [Peer Reviewed Journal]

ISSN: 2391-6478 ;EISSN: 2353-5601 ;DOI: 10.18778/2391-6478.S.2021.11

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  • Title:
    The Impact of Financial Leverage on a Company’s Market Valuation
  • Author: Zimny, Artur
  • Subjects: capital structure ; company financing ; company valuation ; Economy ; financial leverage ; Financial Markets
  • Is Part Of: Finanse i Prawo Finansowe, 2021-09 (1), p.199-214
  • Description: The purpose of the article is to examine the impact of leverage on the market valuation of companies. The article verifies two hypotheses: 1. the degree of leverage is an important factor that impacts the market valuation of companies; 2. for companies with a high level of leverage, the impact of this leverage on their valuation is negative, and for companies with a low level of leverage, the impact is positive. The methodology of the study includes a critical literature review and empirical research based on correlation and regression analysis, including univariate and multivariate regression. The analysis covered quarterly data of ten energy companies listed on the Warsaw Stock Exchange. An important component of the research was classifying those companies into several groups, depending on their level of debt ratio in relation to the industry median debt ratio. The results of the research: The literature review did not provide an unequivocal conclusion to the problem. The empirical analysis did not give grounds to reject the first hypothesis; however, the second one was rejected. The research showed positive correlation and regression coefficients between the debt ratio and the price to book value ratio for highly leveraged companies and negative ones for companies with a low level of debt. The results are surprisingly contrary to the expectations based on theoretical premises.
  • Publisher: Wydawnictwo Uniwersytetu Łódzkiego
  • Language: English;German
  • Identifier: ISSN: 2391-6478
    EISSN: 2353-5601
    DOI: 10.18778/2391-6478.S.2021.11
  • Source: CEEOL: Open Access
    ROAD: Directory of Open Access Scholarly Resources
    DOAJ Directory of Open Access Journals
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