THE EFFECT OF FINANCIAL LEVERAGE ON FIRM PERFORMANCE: EVIDENCE FROM MALAYSIAN LISTED COMPANIES
DOI:
https://doi.org/10.35631/AIJBES.829127Keywords:
Financial Leverage, Firm Performance, Return on Assets, Return on Equity, Malaysian Listed CompaniesAbstract
Financial leverage is a significant financing decision which affects firms’ capital structure and their financial performance. However, the findings from the previous empirical studies are inconsistent on the relationship between financial leverage and firm performance especially in the Malaysian context. Thus, the purpose of this study is to investigate the relationship between financial leverage and firm performance of Malaysian listed companies in the period of COVID-19 and post-COVID-19. The research design of this research is quantitative research, and the data used in this research is secondary data which was obtained from the LSEG Refinitiv database. The sample is 116 Malaysian listed companies, which amounted to 695 firm-year observations in the period of 2020–2025. Panel data regression analysis was used to analyse the relationship between financial leverage and firm performance in terms of return on assets (ROA) and return on equity (ROE). The results indicate that financial leverage has a negative and insignificant relationship with ROA (β = −0.0089, p = 0.845) and a positive and significant relationship with ROE (β = 0.4572, p < 0.001). The results obtained in this paper offer recent Malaysian evidence that the relationship between financial leverage and firm performance varies when adopting different measures of firm performance. The findings can help corporate managers and investors in evaluating their debt financing decisions given the distinct relationship between the use of debt financing and asset-based profitability and shareholders’ returns.
Downloads
References
Alabdulkarim, N., Kalyanaraman, L., & Alhussayen, H. (2024). The impact of firm size on the relationship between leverage and firm performance: Evidence from Saudi Arabia. Humanities and Social Sciences Communications, 11, 1664. https://doi.org/10.1057/s41599-024-04211-x
Arhinful, R., & Radmehr, M. (2023). The effect of financial leverage on financial performance: Evidence from non-financial institutions listed on the Tokyo stock market. Journal of Capital Markets Studies, 7(1), 53–71. https://doi.org/10.1108/JCMS-10-2022-0038
Bank Negara Malaysia. (2025). Financial Stability Review: Second Half 2024. https://www.bnm.gov.my
Ima, U. M., Rabeta, M., Nahar, N., & Sumi, M. S. S. (2024). Leverage-induced profitability in Bangladeshi firms: An empirical analysis. Investment Management and Financial Innovations, 21(1), 356–372. https://doi.org/10.21511/IMFI.21(1).2024.27
Jee, K. F., Ngui, J. E. J., Poh, P. P. J., Chan, W. L., & Wong, Y. S. (2021). Capital structure and firm performance: Evidence from Malaysian public listed plantation companies. UNIMAS Review of Accounting and Finance, 5(1), 116–135. https://doi.org/10.33736/uraf.3536.2021
Khan, A., Zhang, D., Wang, X., & Aneela, I. I. (2024). Impact of leverage on firm financial performance: Evidence from Pakistan. International Journal of Economics, Business and Management Research, 8(5), 63–80. https://doi.org/10.51505/IJEBMR.2024.8506
Khan, S., & Qasem, A. (2024). Are firms' capital structure and performance related? Evidence from GCC economies. Cogent Business & Management, 11(1), 2344749. https://doi.org/10.1080/23311975.2024.2344749
Mohd Shaari, S. N., & Nik Kamarudin, N. N. A. (2024). The moderating effect of the pandemic on capital structure and firm performance in Malaysia. Asia-Pacific Management Accounting Journal, 19(1), 25–49. https://doi.org/10.24191/APMAJ.V19i1-02
Monday, J. U., & Dopemu, O. S. (2024). Does leverage affect profitability and firm value of Nigerian firms? A panel modeling of Nigerian banking industry. Research Journal of Finance and Accounting, 15(8). https://doi.org/10.7176/RJFA/15-8-02
Morais, F., Serrasqueiro, Z., & Ramalho, J. J. S. (2024). Is zero leverage good for firms' performance? The European Journal of Finance. https://doi.org/10.1080/1351847X.2024.2433017
Mutumanikam, P. R., & Adelin, D. (2024). The impact of financial leverage on firm performance in emerging markets: An empirical analysis. Dinasti Accounting Review, 2(1), 40–46. https://doi.org/10.38035/dar.v2i1.1037
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Nguyen Le Hoa Tuyet, L. T. N., & Le Khuong Ninh. (2024). The moderating effect of competition on the leverage–performance relation: Evidence from Vietnam. Asian Academy of Management Journal, 29(2), 65–90. https://doi.org/10.21315/aamj2024.29.2.3
Ong, Z. H., Zaidi, N. S., Mohamed Yusof, S., & Md Yusoff, I. Y. (2025). Working capital dynamics and firm performance: Evidence from Malaysian technology firms. UNIMAS Review of Accounting and Finance. https://doi.org/10.33736/uraf.11723.2025
Qurochman, A. N., & Putra, A. N. A. S. (2024). The effect of financial leverage and operating leverage on company profitability. International Journal on Social Science, Economics and Art, 14(2), 228–237. https://www.ijosea.isha.or.id/index.php/ijosea/article/view/531
Zaidi, N. S., & Abd Kadir, N. H. M. (2024). A study of Malaysian pharmaceutical companies on financial leverage and firm performance. UNIMAS Review of Accounting and Finance, 8(1), 147–159. https://doi.org/10.33736/URAF.8629.2024
