Impact of Financial Leverage on Debt Servicing Capability - A Comparative Study Between Listed MNCs and Domestic Companies of Bangladesh

Syed Md. Khaled Rahman, Tasmina Chowdhury Tania

Abstract


The use of debt in a firm’s capital structure is called financial leverage. The main objective of the study was to analyze the impact of financial leverage on debt servicing capability of DSE-listed MNCs & domestic companies in Bangladesh over a 20-year period (1998-2017).The study was based on secondary data. There are two populations in the study-one for MNCs and other for domestic companies. Stratified and Quota Sampling techniques were applied for the selection of sample items of MNCs and domestic companies respectively. Seven companies from each of the two populations were selected as sample from six industrial sectors.It is seen that MNCs’ interest paying ability and debt repayment capability is far higher than that of domestic companies in every year. In case of both types of firms, correlation coefficient between DFL (CS) and coverage ratio is significant. Weakly negative relationship is seen between DFL (General) and coverage ratios. MNCs show comparatively stronger negative relationship between all measures of DFL and coverage ratios than domestic companies. In case of domestic companies, correlation coefficient between coverage ratios and three leverage ratios (TD/TA, TD/SE and TD/CE) are significant. In case of MNCs, correlation coefficient between TIE and LTD/CE is significant.


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DOI: https://doi.org/10.5296/ijafr.v9i4.14480

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