Impact of Debt Financing on Financial Leverage Risk of Firms: A Comparative Study between Listed MNCs and Domestic Companies of Bangladesh

Abstract

Financial risk of leverage or capital gearing lies in the possibilities of loss of equity earnings and threat to insolvency. The main objective of the study was to explore the impact of debt financing on financial leverage risk of DSE-listed MNCs & domestic companies of Bangladesh over a 20-year period (1996-2015). After analyzing domestic companies and MNCs, it is seen that leverage ratios are positively related with financial leverage risk (FLR). For domestic companies, 1% increase of 2nd difference of TD/SE and TD/TA results in 0.005 and 0.001 increase in 2nd difference of FLR (CV) respectively and vice-versa. For MNCs, 1% increase of 2nd difference of TD/SE and TD/TA results in 0.009 and 0.065 increase in FLR (CV) [2nd difference] respectively and vice-versa. After test of null hypothesis, it is seen that, domestic companies’ debt-equity ratio has significant impact on FLR (CV) whereas MNCs’ debt ratio has significant impact on both the measures of FLR.