View full metadata
THIS DOI METADATA WAS LAST UPDATED: 2025-01-13 16:02
Cite as
-
Full Title
FINANCIAL REPORTING
-
Publisher
FrancoAngeli
-
ISSN
2036-671X (Printed Journal)
2036-6779 (Online Journal)
-
Journal Issue Number
2
-
Journal Issue Designation
2
-
Journal Issue Date
2024
-
Full Title
Does leverage create or destroy value in the long run? A re-examination of Nissim and Penman (2001)
-
By (author)
-
First Page
47
-
Last Page
76
-
Language of text
English
-
Publication Date
2024/12
-
Copyright
2024 FrancoAngeli srl
Main description
Purpose: This paper explores the crucial role of financial statement analysis for equity valuation, reaffirming and extending Nissim and Penman's seminal find-ings (2001). Design and methodology: We use a worldwide dataset comprising 82,481 obser-vations across 33 countries from 2005 to 2022 to provide updated benchmarks to Nissim and Penman's (2001) findings and facilitate forecasting and valuation. Our methodology involves both cross-sectional and time-series analyses. The cross-sectional analysis aggregates financial ratios over all firms and years, while the time-series analysis tracks the median values of portfolios over successive five-year periods. Findings: Our analyses reveal that value creation and growth dynamics are intri-cately linked, with performance metrics significantly influenced by operating and Financial Leverage. The median Return On Common Equity (ROCE) and Return on Net Operating Assets (RNOA), spread, and net borrowing costs collectively indi-cate a generally positive leverage effect on firm returns. Additionally, our findings demonstrate the importance of differentiating between operating and financing assets and liabilities when assessing Financial Leverage. Contribution: Overall, the findings contribute valuable insights for managers and academics. They offer a deeper understanding of how leverage affects firm per-formance, which can inform strategic decision-making to enhance value creation. This paper extends the empirical foundation for equity valuation and financial forecasting, providing relevant benchmarks for financial analysis.
Reference list of
10.3280/FR2024-002003
Unstructured Citation
Barro, R. (2003). Determinants of economic growth in a panel of countries. Annals of Economics and Finance, 4, 231-274.
Unstructured Citation
Dammon, R. B., & Senbet, L. W. (1988). The effect of taxes and depreciation on corporate investment and Financial Leverage.
The Journal of Finance, 18(2), 357-373.
https://doi.org/10.1111/j.1540-6261.1988.tb03944.x
Unstructured Citation
Dhaliwal, D., Heitzman, S., & Li, O. Z. (2006). Taxes, leverage, and the cost of equity capital. Journal of Accounting Research,
44(4), 691-723.
https://doi.org/10.1111/j.1475-679X.2006.00214.x
Unstructured Citation
Dhaliwal, D., Trezevant, R., & Wu, S.-W. (1992). Taxes, investment-related tax shields and capital structure. Journal of the American Taxation Association, 14(1), 1-21.
Unstructured Citation
Dickinson, V. (2011). Cash flow patterns as a proxy for firm life cycle. The Accounting Review, 86(6), 1969-1994.
https://doi.org/10.2308/accr-10130
Unstructured Citation
FASB Statement No. 115. (1993). Accounting for certain investments in debt and equity securities. Financial Accounting Standards Board.
Unstructured Citation
Feltham, G. A., & Ohlson, J. A. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary
Accounting Research, 11, 689-731.
https://doi.org/10.1111/j.1911-3846.1995.tb00462.x
Unstructured Citation
Hanlon, M., & Heitzman, S. (2022). Corporate debt and taxes. Annual Review of Financial Economics, 14(1), 509-534.
https://doi.org/10.1146/annurev-financial-101221-103806
Unstructured Citation
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal
of Financial Economics, 3(4), 305-360.
https://doi.org/10.1016/0304-405X(76)90026-X
Unstructured Citation
Li, M., & Nissim, D. (2014). Growth, profitability, and equity value. SSRN Working Paper.
Unstructured Citation
McClure, B. (2021). Spotting profitability with ROCE. Investopedia. -- Retrieved from https://www.investopedia.com/stocks/05/010305.asp.
Unstructured Citation
Mittnik, S., Robinzonov, N., & Spindler, M. (2015). Stock market volatility: Identifying major drivers and the nature of their
impact. Journal of Banking & Finance, 58, 1-14.
https://doi.org/10.1016/j.jbankfin.2015.04.003
Unstructured Citation
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporate finance, and the theory of investment. American Economic Review, 48(3), 261-297. -- https://www.jstor.org/stable/1809766.
Unstructured Citation
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433-443. -- https://www.jstor.org/stable/1809167.
Unstructured Citation
Molina, C. A. (2005). Are firms underleveraged? An examination of the effect of leverage on default probabilities. The Journal
of Finance, 15(3).
https://doi.org/10.1111/j.1540-6261.2005.00766.x
Unstructured Citation
Nissim, D. (2024). Earnings quality, fundamental analysis, and valuation. Columbia Business School Research Paper.
Unstructured Citation
Nissim, D., & Penman, S. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies,
6, 109-154.
https://doi.org/10.1023/A:1011338221623
Unstructured Citation
Pittman, J. A. (2002). The influence of firm maturation on tax‐induced financing and investment decisions. Journal of the
American Taxation Association, 24(2), 35-59.
https://doi.org/10.2308/jata.2002.24.2.35
Unstructured Citation
Ross, S. (1973). The economic theory of agency: The principal’s problem. American Economic Review, 63, 134-139. -- https://www.jstor.org/stable/1817064.