Journal of Applied Sciences1812-56541812-5662Asian Network for Scientific Information10.3923/jas.2016.438.444MatemilolaBolaji TundeBany-AriffinA.N.Azman-SainiW.N.W.NassirAnnuar Md.92016169Background 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.]]>Ezeoha, A. and F. Botha,2012Visser, A.,2015Ross, W. and J. Jaffe,2013Islam, S.Z. and S. Khandaker,2015Ahmad, A.H. and N.A.H. Abdullah,2013Lin, F.L. and T. Chang,2011Chang, K.C., C.C. Yuan, C.L. Lin and W. Zhou,2014Tiantian, G., T. Yezhuang and Y. Qianqian,2014Hansen, B.E.,1999Kremer, S., A. Bick and D. Nautz,2013Johnson, T.C., T. Chebonenko, I. Cunha, F. D'Almeida and X. Spencer,2011Dawar, V.,2014Matemilola, B.T., A.N. Bany-Ariffin and W.N.W. Azman-Saini,2012Modigliani, F. and M.H. Miller,1958Matemilola, B.T., B.A.A. Noordin, W.A.S.W. Ngah and A.M. Nassir,2015Frank, M.Z. and V.K. Goyal,2008Myers, S.C.,1984Oztekin, O. and M.J. Flannery,2012Nunkoo, P.K. and A. Boateng,2010Shyam-Sunder, L. and S.C. Myers,1999Graham, J.R., M.T. Leary and M.R. Roberts,2015Modigliani, F. and M.H. Miller,1963Bhandari, L.C.,1988Ahmad, Z., N.M.H. Abdullah and S. Roslan,2012Dimitrov, V. and P.C. Jain,2008Penman, S.H., S.A. Richardson and I. Tuna,2007Caner, M. and B.E. Hansen,2004Monteiro, A.,2006Tchuigoua, H.T.,2014Bany-Ariffin, A.N.,2010Graham, J.R. and C.R. Harvey,2001Acheampong, P., E. Agalega and A.K. Shibu,2014Amihud, Y.,2002Gomes, J.F. and L. Schmid,2010Chan, K.C. and N.F. Chen,1991Schmidt, A.P.,2006Arellano, M. and O. Bover,1995Blundell, R. and S. Bond,1998Sargan, J.D.,1958