The Impact Of Financial Leverage On The Payoffs Of Stockholders And Market Value

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Original Work Statement
“I, Awoundan Eyimin, verify that this article review is solely my own work and creation and it has been prepared solely for credit in this class, and that this review, including the “main issue of the article” section has been written in my own words.”
Article Citation
Negi, P., Sankpal, S., Mathur, G., & Vaswani, N. (2012). Impact of financial leverage on the payoffs to stockholders and market value. IUP Journal of Accounting Research & Audit Practices, 11(1), 35-46. Retrieved from http://ezproxy.bellevue.edu:80/login?url=http://search.proquest.com/docview/1019956952?accountid=28125
Main Issue of Article
This article reviews a study done on 50 companies listed on NSE and BSE—10 each from the auto, cement, FMCG, oil and gas and pharmaceutical industries in India. The purpose of the study is to evaluate the impact of financial leverage on shareholders’ return and market value. The 10 companies selected in each industry are equally divided into two categories: low leverage companies and high leverage companies. Shareholders’ return is computed through earnings per share and return on equity ratio. As for market value, it is measured through the dividend payout and price-earning ratio.
The results showed that financial leverage has little to no effect on earnings per share of high-leverage companies of Indian auto, cement, FMCG, oil and gas and pharmaceutical industries but has an impact on earnings per share of low-leverage companies of auto and cement industries in India.
Relationship to Course
This article relates to a few key notions reviewed in chapter 1: shareholders’ value and capital structure, which the mix of debt and equity on which a firm relies. . The ultimate goal of managers is to maximize shar...

... middle of paper ...

...hich raises capital through debt financing is believed to have favorable prospects whereas a firm which raises capital through equity financing is believed to have unfavorable prospects.
I believe financial managers have to be very careful about the decisions they make when choosing to either finance through debt or equity. Though it may seem more profitable to do so through debt, there is a cost associated with it and the motive behind choosing either one should be in my opinion which one between the two options will lead to a long-term growth and be sustainable under economic conditions. One thing I also understand from this article is that opting for debt over equity financing as the best way to balance the interests of all stakeholders and increase value for shareholders depends on the type of industry the firm operates in and how leveraged the firm currently is.

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