Effect of financial leverage on shareholder’s returns in a dynamic business environment
Lateef Oyinloye, Temitayo O. Olaniyan 
, Bamidele O. Agbadua
Abstract
Modigliani and Miller’s (1963) paper made revelations on the importance of leverage in reducing tax payment obligations. Shareholders’ return may affect the risk premium associated with the use of leverage. However, the literature on leverage and shareholder returns relationships for a dynamic business environment such as Nigeria is still growing. The one-step differenced generalised method of moments (GMM) estimator is used in analysing an unbalanced panel data of 18 insurance firms for the period 2008-2017. The data used are gleaned from the annual reports of the sampled insurance companies. Results showed that the debt ratio has a significant negative effect on shareholders’ returns. However, the results become positive and significant when debt-equity and interest coverage ratios are used as the leverage ratio. This study supports the pecking order theory. It concluded that the effect of financial leverage on shareholders’ returns depends largely on the decomposition of financial leverage; hence both theories examined are relevant. This study recommended, among other things, that there is a need for the management of insurance companies to reassess the costs and risks associated with financial leverage when financing decisions have to be made. Furthermore, high indebtedness should be trimmed to reduce its negative influence on shareholders’ returns by ensuring an appropriate finance option, which will be in accordance to maximise shareholders’ wealth.
Keywords: Financial Leverage, GMM, Shareholders’ Return, Financial Performance, Nigeria
Authors’ individual contribution: Conceptualization – L.O.; Methodology – T.O.O.; Investigation – T.O.O.; Resources – L.O.; Writing – Original Draft – L.O.; Writing – Review & Editing – B.O.A.
Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
JEL Classification: D21, G11, G32, M21, L25
Received: 21.07.2020
Accepted: 28.09.2020
Published online: 01.10.2020
How to cite this paper: Oyinloye, L., Olaniyan, T. O., & Agbadua, B. O. (2020). Effect of financial leverage on shareholder’s returns in a dynamic business environment. Corporate Governance and Organizational Behavior Review, 4(2), 40-49. https://doi.org/10.22495/cgobrv4i2p4
Amount: 14 EUR
