ANALYSIS OF FINANCIAL LEVERAGE ON PROFITABILITY AND RISK

Abstract

This study presents an empirical insight into the relationship between return on equity (roe), financial leverage and size of firms in the restaurant industry for the period 1998 to 2003 using ols regressions. Research results suggest that at least during the test period firm size had a more dominant effect on roe of restaurant firms than debt use, larger firms earning significantly higher equity returns. Results also suggest that regardless of having lower financial leverage, smaller restaurant firms were significantly more risky than larger firms. As such, the dominance of size effect in the roe-financial leverage relationship within the restaurant industry is better understood.