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Financial leverage and firm valuation: an empirical study of Indian metal industry

Author Affiliations

  • 1B.N. Bahadur Institute of Management Sciences, University of Mysore, Manasagangothri, Mysore, Karnataka, India
  • 2B.N. Bahadur Institute of Management Sciences, University of Mysore, Manasagangothri, Mysore, Karnataka, India

Res. J. Recent Sci., Volume 9, Issue (1), Pages 19-25, January,2 (2020)

Abstract

The process of determining optimal capital structure in the world of inefficient capital market makes it a complicated affair. In corporate finance, the crucial argument is the impact of financial leverage on firms′ strategic decisions. Thus, the debate still prevails as how to minimize the agency costs while maximizing the firm value.Additionally, value of firm is gauged by all stake holders which reflect the value of business. The aim of this research is to appraisethe impact of financial leverage on value of firm. The paper attempts to analyse the debt patterns over time and its impact on firm value reflected in market to book ratio using information on publicly traded firms in India. The study involves ratio analysis and multiple regression method to arrive at the results. Empirical findings on the firms related to metal and metal products in India suggest that there is no mean reverting tendency in debt ratios over time. Instead, debt is increasing to unsustainable levels accompanied by poor governance leading to potential disruption in industry. Besides, leverage has negative impact on firm value contradicting traditional trade off theory.

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