The Impact of Leverage on Corporate Financial Performance: A Comprehensive Literature Review
Abstract
Leverage is a critical concept in financial management that can significantly influence a company's capital structure and overall performance. Properly managed leverage can enhance a company's return on equity, but it also elevates the risk of bankruptcy if not handled with care. This literature review aims to provide a comprehensive analysis of the impact of leverage on corporate financial performance, drawing insights from recent studies and highlighting key factors that affect the effective use of leverage in various industrial contexts. Previous studies have shown that leverage can enhance operational efficiency and the productivity of invested capital, supporting corporate growth and value. However, improper leverage decisions can increase financial risk and instability. Additionally, the interaction between leverage, capital structure, and corporate governance highlights the importance of strategic financial planning and robust governance frameworks in optimizing financial outcomes. The relationship between leverage and corporate social responsibility (CSR) also demonstrates that well-managed leverage can amplify the positive effects of CSR initiatives on financial performance and risk management. This review provides valuable insights for academics and practitioners, identifying gaps in the literature and calling for more comprehensive and context-specific studies to further explore these dynamics.
References
Abdullah, H. (2021). Profitability and Leverage as Determinants of Dividend Policy: Evidence of Turkish Financial Firms. Eurasian Journal of Management & Social Sciences, 2(3). https://doi.org/10.23918/ejmss.V2i3p15
Aharon, D. Y., & Yagil, Y. (2019). [No titleThe Impact of Financial Leverage on the Cost of Equity found]. International Journal of Economics and Financial Issues, 9(2).
Alarussi, A. S. A. (2021). Financial ratios and efficiency in Malaysian listed companies. Asian Journal of Economics and Banking, 5(2), 116–135. https://doi.org/10.1108/AJEB-06-2020-0014
Arhinful, R., & Radmehr, M. (2023). The Impact of Financial Leverage on the Financial Performance of the Firms Listed on the Tokyo Stock Exchange. Sage Open, 13(4), 21582440231204099. https://doi.org/10.1177/21582440231204099
Bintara, R. (2020). The Effect of Working Capital, Liquidity and Leverage on Profitability. Saudi Journal of Economics and Finance, 04(01), 28–35. https://doi.org/10.36348/sjef.2020.v04i01.005
Chen, C.-C., Khan, A., Hongsuchon, T., Ruangkanjanases, A., Chen, Y.-T., Sivarak, O., & Chen, S.-C. (2021). The Role of Corporate Social Responsibility and Corporate Image in Times of Crisis: The Mediating Role of Customer Trust. International Journal of Environmental Research and Public Health, 18(16), 8275. https://doi.org/10.3390/ijerph18168275
Chen, H. (2020). The Impact of Financial Leverage on Firm Performance – Based on the Moderating Role of Operating Leverage. 464–473. https://doi.org/10.2991/aebmr.k.201211.079
Huynh, Q. L., Hoque, M. E., Susanto, P., Watto, W. A., & Ashraf, M. (2022). Does Financial Leverage Mediates Corporate Governance and Firm Performance? Sustainability, 14(20), Article 20. https://doi.org/10.3390/su142013545
Jihadi, M., Vilantika, E., Hashemi, S. M., Arifin, Z., Bachtiar, Y., & Sholichah, F. (2021). The Effect of Liquidity, Leverage, and Profitability on Firm Value: Empirical Evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), 423–431. https://doi.org/10.13106/jafeb.2021.vol8.no3.0423
Kasasbeh, F. I. (2021). Impact of financing decisions ratios on firm accounting-based performance: Evidence from Jordan listed companies. Future Business Journal, 7(1), 15. https://doi.org/10.1186/s43093-021-00061-0
Kijkasiwat, P., Hussain, A., & Mumtaz, A. (2022). Corporate Governance, Firm Performance and Financial Leverage across Developed and Emerging Economies. Risks, 10(10), Article 10. https://doi.org/10.3390/risks10100185
Kusumawati, R., Asyilah, N. H., & Bukhori, I. (2022). Corporate Social Responsibility’s (CSR) Impact on Financial Performance: Moderating Effects of Earnings Management and Leverage. Jurnal Manajemen Bisnis, 13(2), Article 2. https://doi.org/10.18196/mb.v13i2.12888
Kustiwi, Irda Agustin. 2024. “Accounting Information System (Ais): Integration of Artificial Intelligence and Management in Farm Tourism Kelompok Tani Elok Mekar Sari.” DiE: Jurnal Ilmu Ekonomi Dan Manajemen 15(1):123–31. doi: 10.30996/die.v15i1.10634.
Legesse, T. S., Tang, J., Wu, Z., & Guo, H. (2021). Debt financing, corporate investment and the productivity of capital invested: Evidence from biggest manufacturing countries. Cogent Economics & Finance, 9(1). https://doi.org/10.1080/23322039.2021.1936369
Mallinguh, E., Wasike, C., & Zoltan, Z. (2020). The Business Sector, Firm Age, and Performance: The Mediating Role of Foreign Ownership and Financial Leverage. International Journal of Financial Studies, 8(4), Article 4. https://doi.org/10.3390/ijfs8040079
Markonah, M., Salim, A., & Franciska, J. (2020). Effect Of Profitability, Leverage, And Liquidity To The Firm Value. Dinasti International Journal of Economics, Finance & Accounting, 1(1), 83–94. https://doi.org/10.38035/dijefa.v1i1.225
Mehmood, R., Hunjra, A. I., & Chani, M. I. (2019). The Impact of Corporate Diversification and Financial Structure on Firm Performance: Evidence from South Asian Countries. Journal of Risk and Financial Management, 12(1), Article 1. https://doi.org/10.3390/jrfm12010049
Nadilla, T., Ulfah, A., Hayati, H., Midesia, S., & Puspita, D. (2019, November 26). The Effect Of Leverage And Earning Per Share On Earning Management (A Study Of Companies Listed In Indonesia Stock Exchange). Proceedings of The 2nd International Conference On Advance And Scientific Innovation, ICASI 2019, 18 July, Banda Aceh, Indonesia. https://eudl.eu/doi/10.4108/eai.18-7-2019.2288646
Nazir, A., Azam, M., & Khalid, M. U. (2021). Debt financing and firm performance: Empirical evidence from the Pakistan Stock Exchange. Asian Journal of Accounting Research, 6(3), 324–334. https://doi.org/10.1108/AJAR-03-2019-0019
Poursoleiman, E., Mansourfar, G., & Abidin, S. (2020). Financial leverage, debt maturity, future financing constraints and future investment. International Journal of Islamic and Middle Eastern Finance and Management, 13(4), 613–634. https://doi.org/10.1108/IMEFM-10-2019-0430
Ratnawati,T. Kustiwi, I. A., etc. 2023. Internal Audit of Cupak Village Fund Budgetting Process, Nguskan, Jombang. International Journal Of Social Science Humanity & Management Research, Volume 02 Issue 09 September 2023, Page No. 987-999. DOI: 10.58806/ijsshmr.2023.v2i9n17
Zaitoun, M., & Alqudah, H. (2020). The Impact of Liquidity and Financial Leverage on Profitability: The. 1(4).
