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ROLE OF FINANCIAL AND OPERATING LEVERAGE IN FIRMS’ PROFITABILITY DURING PRE & POST 2008 FINANCIAL CRISIS: AN INVESTIGATION FROM CHEMICAL SECTOR OF PAKISTAN

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Author: NASIR GUL SWATI


Citable URI : https://vspace.vu.edu.pk/detail.aspx?id=168

Publisher : Virtual University

Date Issued: 12/20/2018 12:00:00 AM


Abstract

This study investigates the role of financial and operating leverages in firms’ profitability before and after financial recession/crisis of 2008 focusing on chemical sector firms listed on the Pakistan Stock Exchange (PSX). The period of study selected is from 2004 to 2015. The ROE is taken as dependent variable. The Financial Leverage (FL) and Operating Leverage (OL) are chosen as independent variables or predictors. Three other variables like Assets Utilization (AU), Non-Debt Tax Shield (NDTS) and Age have been introduced as control variables. Another variable named Pre/Post is introduced as a dummy variable for the indication of pre and post financial crisis 2008. A population of all 43 firms listed on PSX is selected. The 29 chosen firms relate to the chemical sector directly whereas 14 firms are indirectly related to the chemical industry. The data used in the analysis has been gathered from secondary sources i.e. from the SBP’s publications. The regression model used is panel linear model (PLM). The unbalanced data panel has been used in the analysis. Similarly, the random effect approach has been applied. The Stata statistical software has been used to estimate the relationship between predicted/dependent and predictor/independent variables. Following outcomes have been accomplished after the examination; the FL has a negative but significant relationship with the firm’s profitability whereas the OL has a positive but non-significant relationship with the firm’s profitability. The AU has shown a positive and significant relationship with the firm’s profitability. Whereas other predictors like Age, NTDS have proved a positive but non-significant relationship with the firm’s “ROE”. Both types of leverages have shown a negative impact on the firm’s profitability after the global financial crisis in 2008. Keywords: Profitability, Financial leverage, Operating leverage, Assets Utilization, Age, non-debt tax shield, Financial Recession/Crisis 2008 and Pre/Post.


URI : https://vspace.vu.edu.pk/details.aspx?id=168

Citation: Swati, N, S(2017). ROLE OF FINANCIAL AND OPERATING LEVERAGE IN FIRMS’ PROFITABILITY DURING PRE & POST 2008 FINANCIAL CRISIS: AN INVESTIGATION FROM CHEMICAL SECTOR OF PAKISTAN. Virtual University of Pakistan.(Lahore, Pakistan).

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