Financial Leverage: Financial Leverage and Its Impact on Firm Success. Drawing salient insights from many recent agency studies, this book charts that financial Leverage is significantly and negatively related to firm productivity. The paper also traces the decline in Leverage over the past two decades, and the authors describe new measures of financial Leverage that are more relevant for a firm’s bottom line. Finally, in looking at recent corporate history, they suggest that Leveraged buyouts may be an important force behind rising stock price.
Asset-Liability Multi-Fsigma: Financial Leverage as a Predictor of Firm Investment. Using aggregate asset-liability data to create a measure of Firm Investment, this study finds that firms with higher levels of financial Leverage tend to have lower average firm growth rates, implying that financial risk is one of the drivers of firm value. Using both qualitative and quantitative methods, this paper produces strong evidence that the correlation between financial risk and firm value is negative, meaning that higher levels of financial risk cause lower rates of investment and higher value of ownership. The results imply that increasing the level of financial Leverage negatively impacts firm growth. The negative effects of financial leverage become evident when firms take into account the influence of their relative balance-of-payments composition, using regression analysis. The results imply that financial-risk is a substantial driver of firm valuation across firms-older and newer.
Measuring Firm Investment. This study draws on existing concepts to develop a framework for measuring firm investment. It distinguishes five different types of Firm Investment:
Government Intervention: The impact of government intervention on firm investments is examined through the lens of macroeconomics. Specifically, researchers investigate the relationship between government interventions and firm investments during specific periods (referred to as “crisis periods”) and draw on aggregate financial indicators, such as credit restrictions, bank operations, and tax policies. After developing a list of the number of government interventions over time and identifying the nature of the interventions, the researchers evaluate the impact of government interventions on the level of government intervention and on firms’ returns. The review reveals that government interventions have a minimal impact on equity and the quality of jobs and do not affect the quality or availability of capital. The research concludes that there is no consistent evidence that government interventions lead to optimal firm investment or employment.
Economic Stimulus Package: The impact of the economic stimulus package is examined by studying firm size and business cycles. Specifically, researchers examine the effect of the package on total employment, production, investment, capacity utilization, productivity, output, sales, and costs. Interestingly, employment does not increase as much as predicted, while output, production, and capacity utilization increase significantly. The research indicates that the package’s positive effects on firms do not necessarily translate into improved firm investment practices. Additionally, the increase in the size of firms is likely to be short-lived because labor productivity is likely to decline once other domestic industries begin to adjust to the rising demand for labor.
Financial Crisis: Since the initiation of the economic stimulus program, banks have begun relaxing their borrowing requirements. In addition, financial institutions have been encouraged to refinance loans with greater frequency. Because banks are loosening their purse strings, there is an increased chance that households will divert some of their surplus funds to liquidate financial investments rather than spend it on unimportant items. As of May, 2021, financial analysts are speculating that the financial crisis will continue to recur, which could result in more adverse effects on firms’ bottom lines. While the positive effects of the fiscal stimulus program are currently underway, the effect of the financial crisis on the overall economy is still being assessed.
