UPM Institutional Repository

Non-linearity in debt and return relationship: evidence from dynamic panel threshold method


Matemilola, Bolaji Tunde and Amin Noordin, Bany Ariffin and Wan Ngah, Wan Azman Saini and Md Nasir, Annuar (2016) Non-linearity in debt and return relationship: evidence from dynamic panel threshold method. Journal of Applied Sciences, 16 (9). pp. 438-444. ISSN 1812-5654; ESSN: 1812-5662


Background and objective: Moderate debt usage increases returns during economic boom, but high debt could decreases returns during economic recession. This study examines if there is a threshold debt level in the debt-returns relationship. Methodology: This study applies dynamic panel-threshold method to determine optimal debt level beyond which further increases in debt decreases returns. This study finds a threshold effect of 20.570% between debt ratio and return on equity. If the debt ratio is lower than 20.570%, a 1% increases in debt ratio increase return on equity by 0.128%. But, when the debt ratio is higher than 20.570%, a 1% increase in debt ratio decreases return on equity by 0.050%. Results: The results suggest that there is an optimal debt ratio of 20.570% at which point further increase in debt decreases return on equity. Conclusion: These results support the tradeoff theory, which suggests that there is an optimum debt level that maximizes returns.

Download File

Non-linearity in debt and return relationship.pdf

Download (6kB) | Preview
Official URL or Download Paper: http://scialert.net/abstract/?doi=jas.2016.438.444

Additional Metadata

Item Type: Article
Divisions: Faculty of Economics and Management
DOI Number: https://doi.org/10.3923/jas.2016.438.444
Publisher: Asian Network for Scientific Information
Keywords: Returns; Debt; Tradeoff theory; Dynamic panel-threshold analysis
Depositing User: Nurul Ainie Mokhtar
Date Deposited: 26 Oct 2017 05:03
Last Modified: 26 Oct 2017 05:03
Altmetrics: http://www.altmetric.com/details.php?domain=psasir.upm.edu.my&doi=10.3923/jas.2016.438.444
URI: http://psasir.upm.edu.my/id/eprint/53393
Statistic Details: View Download Statistic

Actions (login required)

View Item View Item