The relationship between financial leverage and financial performance with an emphasis on financial distress and currency crisis in Tehran Stock Exchange

Objective: The main objective of this article is to examine the relationship between financial leverage and financial performance. After identifying this relationship, the moderating effect of financial distress on the strength and weakness of this relationship will be investigated. Then, according to the importance of the effect of the currency crisis on the financial performance of companies, the effect of this moderating variable on the relationship between financial leverage and financial performance is also examined.



Method: The statistical population investigated in this research is Tehran Stock Exchange companies in the period of 2013 to 2022. The data needed to analyze the relationship between the data have been extracted using the library method and using the websites of Central Bank, World Bank and Codal. By using the method of systematic elimination in the society, limitations were taken into account and the final sample included 114 companies from different industries of Tehran Stock Exchange, except financial and investment industry. In this research, financial leverage is considered as an independent variable, financial performance, return on assets, return on equity, Q index, sales return rate and cash flow return rate as dependent variables, financial distress and currency crisis as moderator variables. Data were analyzed using correlation analysis and multivariate regression. The generalized least squares (EGLS) method was used to fit the model.



Findings: The findings show that financial leverage has a significant negative effect on financial performance and this effect is weaker for companies with higher risk of financial distress. In addition, the evidence from the findings show that the currency crisis exacerbates the negative relationship between financial leverage and financial performance.



Conclusion: The negative relationship between financial leverage and the company's financial performance shows that when the company increases its debt level, the increase in debt costs prevails and exceeds its benefits. Managers can improve the company's performance by reducing the level of financial leverage, and by planning to increase internal funds, consider it as an important tool to improve their performance and avoid external financial constraints. In the conditions of high risk of financial distress, the negative effect of financial leverage on financial performance should be reduced. Management problems and the lack of operational and control systems are more severe in companies with a high risk of financial distress; Therefore, monitoring, limiting and increasing the efficiency of the company due to high financial leverage will have a strong positive effect on the financial performance of companies that have a high risk of financial distress (including default in payments, bankruptcy and liquidation). It can be said that higher financial leverage improves the financial performance of companies due to its disciplinary role. In addition, the currency crisis will cause higher costs for investment and use of loans and facilities due to higher inflation. Reducing the level of financial leverage during the currency crisis, when access to foreign financial resources becomes more expensive and difficult, can lead to the improvement of the company's financial performance.