Impact of Financial Leverage on Firm Growth of Sri Lankan Listed Companies

Abstract

This study investigates the impact of financial leverage on firm growth based on the data concerning twenty (20) listed companies in Sri Lanka during the five years ranging from 2013 to 2017. The study measures the firm growth in terms of sales growth, profit growth and assets growth whereas financial leverage are measured in terms of total debt to total assets ratio and total debt to total equity ratio. According to the correlation analysis, it was found that there is a positive significant relationship between TDTE and firm growth (all indicators) and there is only a positive relationship between TDTA and asset growth. According to the R2 values given that variation among variables shown by the model is not due to change and about 15% -26% (Approx.) of the changes in firm growth are explained by the changes in financial leverage of the firm and rest of the changes are due to the other factors. Furthermore, the results show that financial leverage has a significant effect on firm growth. Specifically, financial leverage was found positively influence firm growth, while older firms saw a faster increase in assets sales and profits, and it would be one of the key motivators in maintaining their optimal leverage on firm growth. Therefore, the financial managers and the key decision-makers in the business fields should make trustful decisions utmost concerning the financial leverage and firm growth changes with exploring the impact of other factors as well.