Non-linearity in Debt and Return Relationship: Evidence from Dynamic Panel Threshold Method


	Journal of Applied Sciences
	Year: 2016 \| Volume: 16 \| Issue: 9 \| Page No.: 438-444 DOI: 10.3923/jas.2016.438.444

Non-linearity in Debt and Return Relationship: Evidence from Dynamic Panel Threshold Method

Bolaji Tunde Matemilola, A.N. Bany-Ariffin, W.N.W. Azman-Saini and Annuar Md. Nassir

Abstract: Background and Objective: Moderate debt usage increases returns during economic boom, but high debt could decreases returns during economic recession. This study examines if there is a threshold debt level in the debt-returns relationship. Methodology: This study applies dynamic panel-threshold method to determine optimal debt level beyond which further increases in debt decreases returns. This study finds a threshold effect of 20.570% between debt ratio and return on equity. If the debt ratio is lower than 20.570%, a 1% increases in debt ratio increase return on equity by 0.128%. But, when the debt ratio is higher than 20.570%, a 1% increase in debt ratio decreases return on equity by 0.050%. Results: The results suggest that there is an optimal debt ratio of 20.570% at which point further increase in debt decreases return on equity. Conclusion: These results support the tradeoff theory, which suggests that there is an optimum debt level that maximizes returns.

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How to cite this article:

Bolaji Tunde Matemilola, A.N. Bany-Ariffin, W.N.W. Azman-Saini and Annuar Md. Nassir, 2016. Non-linearity in Debt and Return Relationship: Evidence from Dynamic Panel Threshold Method. Journal of Applied Sciences, 16: 438-444.

DOI: 10.3923/jas.2016.438.444

URL: https://scialert.net/abstract/?doi=jas.2016.438.444

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