The heterogeneous impact of leverage on firm performance: empirical evidence from Bangladesh

Purpose: The purpose of this study primarily is to investigate the heterogeneous effect of leverage on performance of the listed nonfinancial joint stock companies in Bangladesh. Design/methodology/approach: A large panel sample of 165 listed nonfinancial firms under different industries of Bangladesh studied for the period 2007–2016 employing the dynamic panel approaches, namely, differenced generalized method of moments (GMM) and system GMM. The asymmetric relationship between leverage and performance is also examined by quantile regression approach. Findings: GMM showed that the leverage indicators have the negative impact on the performance of the firms in terms of return on equity and return on asset while the quantile regressions revealed the heterogeneous relationship between leverage and profitability. It showed that greater negative impact of leverage on performance in high-profitable firms than low-profitable firms. Research limitations/implications: The study is confined to only the listed nonfinancial joint-stock companies of Bangladesh. Practical implications: The asymmetric relationship between leverage and financial performance identified in this study would be the helpful tool for financial managers for optimal capital structure decisions. Originality/value: This is one of the first in-depth attempts to find the nonlinear heterogeneous effect of leverage on firms' performance.