IMPACT OF FINANCIAL LEVERAGE ON THE PERFORMANCE OF TOURISM FIRMS IN THE MENA REGION

Year 2023, , 156 - 161, 01.02.2023

Rezart Demiraj Enida Demıraj Suzan Dsouza

https://doi.org/10.17261/Pressacademia.2023.1681

Abstract

Purpose – Leverage refers to the use of borrowed capital to finance investment projects. The question of how much debt is optimal for a firm has always been challenging for business managers and scholars alike. Most empirical studies have tried to achieve this, but no conclusive findings have been produced yet. The debt-equity balance changes with the industry, and what is optimal for one industry may not be so for another. Our study aims to determine the impact of leverage on the financial performance of tourism firms in the MENA region.
Methodology – To this purpose, we have collected data from a sample of 71 listed firms from the tourism sector. We have employed pooled and static panel regression, using published financial information from 2010 to 2021 in the MENA region. We obtained an unbalanced and cross-sectional panel of 768 firm-year observations from the 71 firms used in the study.
Findings – The findings reveal that leverage represented by the debt ratio and equity ratio has a significant negative impact on the financial performance of tourism firms represented by ROA and ROE.
Conclusion – The implication of the study findings is that debt levels beyond a certain level can be detrimental to firm performance. Consistent with the trade-off theory, managers must carefully balance the advantages and disadvantages of borrowings over their own capital.

Keywords

MENA, tourism industry, performance, profitability, leverage, capital structure

References

• Abor, J. (2005), The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. Journal of Risk Finance, 6(5), 438-445.
• Alarussi, A.S. and Alhaderi, S.M. (2018), Factors affecting profitability in Malaysia, Journal of Economic Studies, 45(3), 442-458.
• Bessler, W., Drobetz, W., & Pensa, P. (2008). Do managers adjust the capital structure to market value changes? Evidence from Europe. Zeitschrift für Betriebswirtschaft, 78(6), 113-145.
• Baker, M., & Wurgler, J., 2002. Market timing and capital structure. The Journal of Finance, 57(1), 1-32.
• Demiraj, R., Dsouza, S., & Abiad, M. (2022). Working capital management impact on profitability: pre-pandemic and pandemic evidence from the european automotive industry. Risks, 10(12), 236-245.
• Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, 15(1), 1–33.
• Gill, A., Biger, N. and Mathur, N. (2011) The effect of capital structure on profitability: evidence from the United States. International Journal of Management, 28(3), 198-209.
• Habibniya, H., Dsouza, S., Rabbani, M. R., Nawaz, N., & Demiraj, R. (2022). Impact of capital structure on profitability: panel data evidence of the telecom industry in the United States. Risks, 10(8), 157-167.
• Jensen, M. C., & Meckling, W. H. (2007). Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Wiley.
• Karadeniz, E., Yilmaz Kandir, S., Balcilar, M. & Beyazit Onal, Y. (2009), Determinants of capital structure: evidence from Turkish lodging companies, International Journal of Contemporary Hospitality Management, 21(5), 594-609.
• Margaritis, D. and Psillaki, M. (2007). Capital structure and firm efficiency. Journal of Business Finance & Accounting, 34, 1447-1469.
• Mendell, B. C., Sydor, T., & Mishra, N. (2006). Capital structure in the United States forest products industry: The influence of debt and taxes. Forest Science, 52(5), 540-548.
• Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. The American Economic Review, 48(3), 261-297.
• Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American economic review, 53(3), 11-124.
• Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187-221.
• Myers, S.C. (1984) The capital structure puzzle. Journal of Finance, 39(3), 575-592.
• Nasimi, A. N. (2016). Effect of capital structure on firm profitability: an empirical evidence from London, UK. Global Journal of Management and Business Research, 16(4), 261-672.
• Nguyen, V., Nguyen, T., Tran, T., & Nghiem, T. (2019). The impact of financial leverage on the profitability of real estate companies: A study from Vietnam Stock Exchange. Management Science Letters, 9(13), 2315-2326.
• Shubita, M. F., & Alsawalhah, J. M. (2012). The relationship between capital structure and profitability. International Journal of Business and Social Science, 3(16), 104-121.
• Zaitoun, M., & Alqudah, H. (2020). The Impact of liquidity and financial leverage on profitability: the case of Listed Jordanian industrial firms. International Journal of Business and Digital Economy, 1(4), 29-35.