Causal relationship between leverage and performance: exploring Dhaka Stock Exchange

To magnify shareholders' returns, managers employ the use of debt in the firms' capital structure. However, excessive debt financing can often cause financial distress for the firms. In fact, various debt equity ratio levels may lead to different financial performance when compared for high levered and low levered firms. Thus, the aim of this paper is to examine the cause and effect relationship between financial leverage and financial performance of firms. To pursue the purpose, a purposive sample of 163 non-financial firms listed on the Dhaka Stock Exchange (DSE) was selected to conduct this study. Findings indicate that there was no significant difference in the financial performance between high levered and low levered firms, neither in terms of their size nor growth rates. A negative relationship therefore persists between leverage and performance of such firms. Implications of these findings can provide policy guidelines for managers and directions for any further work in this context.