IMPACT OF LEVERAGE ON SHAREHOLDERS’ RETURN:A STUDY ON SELECTED LISTED MANUFACTURING COMPANIES IN

SRI LANKA

Presented by:

S.Niththiya & R.Nirujah Department of Accounting

heldon

15th March, 2014

at International Conference on Contemporary Management

University of JaffnaJaffna, Sri Lanka

Outline of the Presentation

Introduction Objectives Literature Review Conceptualization Operationalization Hypothesis Development Research Methodology Data Analysis and Findings Hypothesis Testing Conclusion Recommendations

Introduction • “The Proportion of Debt to Equity in the financial plan of a firm is called

leverage”. Since optimal debt ratio influences a firm’s market value and shareholder’s return, different firms use different debt ratio at different levels to maximize market value and shareholders return.

• The Shareholders’ return that an investor receives for one or more investments held. In the case of stock, this includes capital gain from  increases  in stock price as well as dividend issued.

• Numerous researches have been conducted over the years on these issues. Most of these empirical studies have been conducted on developed countries perspective.

• Our research aims to investigate impact of leverage on shareholders’ return: a study on selected listed manufacturing companies in Srilanka

Objectives

The main objective of the study is to examine the impact of leverage on shareholders’ return of selected listed manufacturing companies on CSE in Sri Lanka.

To achieve above objective the following sub objectives have enclosed:

To identify the relationship between leverage and shareholders’ return

To access the dependency of leverage on shareholders’ return

To suggest manufacturing companies to maximize shareholders’ return through leverage.

Literature Review Author(s) Discussion(s)/ Finding(s)

Franklin John.S and Muththusamy.K (2011)

They found that a significant positive relationship between leverage and investment and negative relationship between leverage and SR for medium firm.

Sachchidand, Navindra and Totala (2012)

The overall finding indicate that there is not significant influence of financial leverage on shareholders’ return and market capitalaization

Rajni(2012) There positive correlation in the financial leverage and shareholders’ return of telecommunication industry and negative correlation is found between financial leverage and market capitalization

Vijayalakshimi and Padmaja (2013)

The study exposed that the leverage has a significant influence on shareholder value creation.

Conceptualization

Earnings per Share

Return on shareholders’

Funds

Dividend Yield

Deb

t to

Equi

ty

Deb

t to

Tota

l Ass

et

SHAR

EHO

LDER

S’ R

ETU

RN

LEVERAGE

OperationalizationKey Concept Variables Measurement

Leverage Debt to Equity Total Debt/ Shareholders’ Equity

Debt to Total Assets Total Debt/ Total Asset

Shareholders’ Return Earning Per Share (Net Income − Dividends on Preferred Shares)/ Number of Equity Shares Outstanding

Return on Shareholders’ Fund

Net profit after taxation & preference dividend/ (Ordinary share capital + Reserves) * 100%

Dividend Yield Dividend per Share/Market value per Share*100%

Hypotheses Development

• Based on the literature review and objectives the following hypotheses were formulated: Hypothesis-1:

H1: Leverage has an impact on shareholders’ return. Hypothesis-2:

H2: Leverage and shareholders’ return are significantly correlated.

Methodology

Scope: The scope of the study was listed manufacturing companies listed on Colombo Stock Exchange (CSE), Sri Lanka. Out of 38 companies of this sector, only twelve companies were selected for this study as per the cluster sampling techniques.

Data source: This study was based on the secondary data.

Period of Study: The study covered five years time period from 2008 to 2012.

Variables

i. Dependent Variable : Shareholders’ Return

ii. Independent Variable: Leverage

Mode of analysis

Descriptive statistics are used to describe and summarize the behavior of the variables used in the study. In order to test the research hypotheses; the inferential tests used include the Correlation Analysis and regression analysis.

Data Analysis and Findings

Table 1- Descriptive Statistics

N Minimum Maximum MeanStd.

Deviation VarianceDE 12 .04 1.88 .4910 .4861 .236

DTA 12 .34 2.00 .6224 .4535 .206

EPS 12 .23 13.72 6.9063 4.4318 19.641

ROSF 12 4.39 64.40 16.9537 16.0226 256.724

DY 12 .00 7.66 2.7262 2.2755 5.178

Table 2 CorrelationsDE DTA EPS ROSF DY

DE Pearson Correlation 1

Sig. (2-tailed)DTA Pearson

Correlation .038 1

Sig. (2-tailed) .906EPS Pearson

Correlation -.242 .004 1

Sig. (2-tailed) .448 .990ROSF Pearson

Correlation -.473 -.365 .550 1

Sig. (2-tailed) .121 .244 .064DY Pearson

Correlation -.394 -.445 .467 .805** 1

Sig. (2-tailed) .206 .148 .126 .002

**. Correlation is significant at the 0.05 level (2-tailed).

Table 4 : Coefficient Model

Unstandardized Coefficients

Sta.Coefficients

t Sig.B Std. Error Beta1 Constant

DEDTA

7.912-2.21.131

2.7632.9503.163

-.243.013

2.86-.751.041

.019

.472

.968

2 ConstantDE

DTA

32.017-15.138-12.260

8.3438.9079.549

-.459-.347

3.837-1.699-1.284

.004

.123

.231

3 ConstantDE

DTA

4.936-1.765-2.158

1.1891.2691.360

-.377-.430

4.153-1.391-1.586

.002

.198

.147

a. Dependent Variable: Earning Per Share

Hypotheses Testing

NO Hypotheses Tools Result

H1Leverage has an impact on

shareholders’ return. Regression Rejected

H2Leverage and shareholders’

return are significantly correlated. Correlation Rejected

Table 5 Hypotheses testing

Conclusion

Negative association was observed between DE and EPS, ROSF, and DY all of these association were to be insignificant at 0.05 level.

As well as negative association was observed between DTA and ROSF, DY but the DTA and EPS are positively associated. It was 0.004. Thus confirms there are negative relationships between all variables other than the DTA and EPS.

The result revealed that there was no significant relationship between leverage and shareholders’ return of Srilankan manufacturing companies.

Recommendations

The following suggestions are recommended to increase the Shareholders’ return based on leverage.

I. Firms should use more of equity than debt in financing their business activities

II. The government should create an enabling business friendly environment so that businesses can thrive and thus increase the shareholders’ return

III. Inflation and exchange rate also affect the listed company’s shareholders’ return. Therefore, government should consider the economic growth to control the inflation.

Thank you for your time and

Co-operation