Prague Economic Papers 2021, 30(4):381-401 | DOI: 10.18267/j.pep.774

The Effect of Financial Leverage on Operating Performance: Evidence from the Czech Republic

Zdeněk Toušek ORCID...a, Barbora Malinská ORCID...b, Martin Prokopc, David Procházka ORCID...d
a Czech University of Life Sciences Prague, Department of Trade and Finance and Česká spořitelna a.s., Prague, Czech Republic
b Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague and Česká spořitelna a.s., Prague, Czech Republic
c Česká spořitelna a.s., Prague, Czech Republic
d Faculty of Finance and Accounting, Prague University of Economics and Business, Prague, Czech Republic

The paper investigates the relationship of financial leverage and operating performance in a small open economy. A comprehensive sample consists of panel data from 1,821 Czech firms over the period 2006 to 2017. We find that leverage has a negative effect on the operating performance for the entire sample as well as for subsamples structured according to size or sector. We also find evidence that the relationship between leverage and performance in some sectors and segments is weakened during periods of economic downturn, as well as during the recent foreign exchange interventions of the Czech National Bank. Our study, focusing on the banking perspective, contributes to the debate about the impact of differences in leverage across sectors and segments on the capital allocation channels, managed in small open economies predominantly by banks.

Keywords: Financial leverage, operating performance, firm size, Czech Republic
JEL classification: C20, D20, G33

Received: May 1, 2020; Revised: December 29, 2020; Accepted: February 18, 2021; Prepublished online: March 24, 2021; Published: August 31, 2021  Show citation

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Toušek, Z., Malinská, B., Prokop, M., & Procházka, D. (2021). The Effect of Financial Leverage on Operating Performance: Evidence from the Czech Republic. Prague Economic Papers, 30(4), 381-401. doi: 10.18267/j.pep.774
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