10 papers analyzed
Some studies suggest financial leverage enhances firm efficiency by optimizing capital structure and tapping free cash flow, while other studies indicate that cash holding mediates this relationship and can lead to agency conflicts and inefficiencies.
The relationship between financial leverage and firm efficiency is a critical area of study in corporate finance. This research explores how debt-financing decisions impact firm efficiency and the mediating role of cash holdings in this dynamic.
Inverted U-Shape Relationship Between Financial Leverage and Firm Efficiency:
Negative Impact of Cash Holdings on Firm Efficiency:
Mediating Role of Cash Holdings:
Non-Linear Relationship Between Leverage and Cash Holdings:
Impact of Managerial Attributes on Cash Holdings and Efficiency:
Country-Specific Characteristics:
The research collectively indicates that an optimal level of financial leverage can enhance firm efficiency, while excessive cash holdings tend to reduce it. Cash holdings play a crucial mediating role in this relationship, with the dynamics influenced by managerial attributes and country-specific factors. Firms need to carefully balance their leverage and cash holdings to maximize efficiency and mitigate potential agency problems.
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