Heterogeneous Effect of Financial Leverage on Corporate Performance: A Quantile Regression Analysis of Taiwanese Companies

Abstract

The effect of financial leverage on corporate performance has been debated. We reexamine the effect by using a sample of 6,630 observations from nonfinancial Taiwanese publicly traded companies during the 2008–2012 period, employing the quantile regression approach and comparing its results with the ones provided by conventional models (least squares and fixed effects). Our empirical results show that the effect of financial leverage on the corporate performance is not homogeneous among various quantile levels: the financial leverage destroys (enhances) companies with low (high) return on equity quantiles. Moreover, the association between leverage and corporate performance is trivial when the mid-range performance quantiles are considered. Our findings are consistent with the results provided by Lee and Li [Lee, BS and M-YL Li (2012). Journal of Banking and Finance, 36, 2157–2173] for U.S. firms. The asymmetric relationship between financial leverage and the corporate performance identified in this study can adequately clarify the debated link between financial leverage and the corporate performance reported in previous empirical studies.

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