The International Financial Reporting Standards (IFRS) is a high quality and principle based reporting standards that remove many accounting alternatives. It is therefore, consequently expected to limit the management’s discretion and lessen practices on earnings management. Quite the opposite, some researchers argue that the flexibility in IFRS and its fair value pre-eminence might afford greater opportunities for firms to manage earnings. It is this inaptness which incited and aggravated the conduct of this study.
This study applies a desktop review to investigate the worldwide existing empirical research evidence on the effect of IFRS on earnings management post- IFRS adoption and in relation to other reporting standards and reports whether the results are indistinguishable between developed and developing economies. Accounting research in developed economies has long identified earnings management as a means by which managers manipulate financial reports to mislead other stakeholders on the underlying economic performance of the firm. However, earnings management research did not receive much attention in developing countries such as Nigeria until recently.
The findings reveal that the existing empirical crams and conclusions there on are mixed, inconsistent and difficult to generalise. This indicates the pressing need for country, especially Nigeria to engage on studies of this nature. The study further, stumbles on the fact that IFRS can indistinctly benefit both developing and developed markets when coupled with appropriate effective enforcement machinery. Substantially, the results entail that IFRS is a critical determinant for quality reporting but not a ‘prima facie’ guarantor for quality reporting.
Table of Contents
1.0 INTRODUCTION
2.0 REVIEW OF RELATED LITERATURE
2.1 Theoretical Framework
2.1.1 Pecking order Theory
2.1.2 Trade off Theory
2.1.3 Agency Theory
2.1.4 Irrelevancy Theory
2.1.5 Free Cash flow Theory
2.2 Conceptual Framework
2.2.1 Concept of Financial leverage
2.2.2 Concept of firm Performance
2.3 Empirical Review
3.0 CONCLUSION
4.0 RECOMMENDATIONS
Research Objectives and Core Themes
This study aims to investigate the existing empirical research regarding the impact of financial leverage on firm performance and to determine whether these results vary between developed and developing economies, with a particular focus on the Nigerian context.
- Theoretical analysis of capital structure models (Pecking Order, Trade-off, Agency Theory).
- Examination of the relationship between debt usage and corporate profitability.
- Analysis of the optimal capital structure to maximize shareholder wealth.
- Review of empirical findings from various countries including Nigeria, Pakistan, and Kenya.
- Evaluation of the influence of financial decisions on managerial efficiency and company risk.
Excerpt from the Book
1.0 INTRODUCTION
One of the most debatable issues in corporate finance literature is the relationship between leverage and firm performance. This debate started with the celebrated irrelevance theorem of Miller and Modigliani (1958) which brought about a revolution in corporate finance. According to this theorem in a perfect capital market, where there are no transaction costs and where perfect rationality and certainty prevails, the capital structure choice is of no relevance. Some of the other renowned contributions to corporate finance are by Jensen and Meckling (1976) “agency theory” and Myers (1984) “pecking order” theory. Interestingly, the origin of pecking order theory, as proposed by Myers, is asymmetric information, meaning that company has more information about company affairs than the outsiders.
The view of Jensen and Meckling (1976) is that shareholders prefer high risky and high pay-off projects because they have limited liability if project fail, on the contrary if the project is successful then the shareholders enjoy high residual cash flows after paying the debts. However after a series of modifications made by Jensen and Meckling (1976), it was revealed that the level of debt in a firm financing does have impact on a firm’s behavior and its performance. On the other side, as leverage increases it increase the agency costs because the interests of shareholders and debt holders are different resulting in an increase in the total cost of the company.
Summary of Chapters
1.0 INTRODUCTION: This chapter introduces the ongoing debate regarding the impact of financial leverage on firm performance and outlines the study's objective to address the existing literature gap.
2.0 REVIEW OF RELATED LITERATURE: This chapter provides a comprehensive theoretical and conceptual analysis of capital structure theories and reviews prior empirical studies to highlight inconsistent findings.
3.0 CONCLUSION: This chapter synthesizes the findings of the desktop review, noting that empirical evidence remains mixed and inconclusive across different economic contexts.
4.0 RECOMMENDATIONS: This chapter suggests that further country-specific research is required to better understand the dynamics of financial leverage in developing markets like Nigeria.
Keywords
Financial leverage, Firm performance, Capital structure, Shareholder wealth, Pecking order theory, Agency theory, Trade-off theory, Debt financing, Equity, Profitability, Return on Assets, Return on Equity, Empirical evidence, Corporate finance, Emerging markets.
Frequently Asked Questions
What is the core focus of this research paper?
The paper performs a desktop review of existing empirical evidence to analyze how financial leverage influences the overall financial performance of firms.
What are the central theoretical frameworks discussed?
The study examines several key theories, including the Pecking Order Theory, Trade-off Theory, Agency Theory, Irrelevancy Theory, and the Free Cash Flow Theory.
What is the primary objective of this study?
The objective is to explore the relationship between debt and firm performance and to evaluate why research conclusions on this topic are often mixed or inconsistent across different economies.
Which research methodology does the author employ?
The author utilizes a secondary research methodology, specifically a desktop review of articles from top accounting journals and research papers.
What topics are covered in the main body of the work?
The main body covers the theoretical framework of capital structure, conceptual definitions of leverage and performance, and a detailed empirical review of studies conducted in countries like Nigeria, Pakistan, Kenya, and England.
Which keywords best describe this research?
Key terms include financial leverage, capital structure, shareholder wealth, firm performance, and agency theory.
Why is the "pecking order theory" significant in this context?
It is significant because it explains why profitable firms may prefer internal funding (retained earnings) over debt, reflecting information asymmetries between managers and investors.
What is the author's conclusion regarding firms in developing countries?
The author concludes that because current theories are often based on developed market conditions, they may not be appropriate proxies for developing nations, necessitating more country-specific research.
- Quote paper
- John Joseph (Author), 2018, The Leverage Effect on Financial Performance. A Review of Empirical Evidence, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/429684
