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The impact of leverage on the cost of capital and market value

Author

Listed:
  • Enrico Battisti
  • Luigi Bollani
  • Nicola Miglietta
  • Antonio Salvi

Abstract

Purpose - This paper aims to investigate the impact of leverage on the cost of capital and market value in the Indonesia Stock Exchange (IDX), where there areSharīʿahand non-Sharīʿahcompliant firms. Design/methodology/approach - This study uses a mixed methods sequential exploratory design and is based on an empirical analysis undertaken with a sample of firms listed on the IDX. In particular, a qualitative analysis was conducted to identify theSharīʿah-compliant firms and the qualitative study was designed to compare some financial elements inSharīʿahand non-Sharīʿahcompliant listed companies. The correlations among the main elements observed are considered and a principal component analysis describes the framework. Findings - First, the results of the analysis show that for theSharīʿah-compliant companies, identified as those that apply Islamic principles, the lower level of leverage that it is typical of these type of firms implies a higher cost of capital [cost of equity and weighted average cost of capital (WACC)] than non-Sharīʿahones. Secondly, for theSharīʿah-compliant companies, the lower level of leverage entails a higher market value measured by the multiples method (price/earning and enterprise value/operating profit) than for non-Sharīʿahones. Originality/value - This paper sheds new light on how leverage can affect the cost of capital and market value in the case ofSharīʿahand non-Sharīʿahcompliant listed companies in the IDX. In particular, this research highlights the fact thatSharīʿah-compliant firms, despite having a higher WACC, create more market value compared to non-Sharīʿahcompliant ones.

Suggested Citation

  • Enrico Battisti & Luigi Bollani & Nicola Miglietta & Antonio Salvi, 2020. "The impact of leverage on the cost of capital and market value," Management Research Review, Emerald Group Publishing Limited, vol. 43(9), pages 1081-1096, March.
    • Handle: RePEc:eme:mrrpps:mrr-01-2019-0007
    DOI: 10.1108/MRR-01-2019-0007
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    Citations

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    Cited by:

    1. Battisti, Enrico & Nirino, Niccolò & Leonidou, Erasmia & Thrassou, Alkis, 2022. "Corporate venture capital and CSR performance: An extended resource based view’s perspective," Journal of Business Research, Elsevier, vol. 139(C), pages 1058-1066.
    2. Monika Bolek & Agata Gniadkowska-Szymańska, 2023. "Is the Growth of Companies Influencing Their Financial Condition Depending on Their Size: S&P 500 Listed Companies Example," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(2), pages 323-337, June.
    3. Battisti, Enrico & Giachino, Chiara & Iaia, Lea & Stylianou, Ioanna & Papatheodorou, Andreas, 2022. "Air transport and mood in younger generations: The role of travel significance and COVID-19," Journal of Air Transport Management, Elsevier, vol. 103(C).
    4. Xiaoping Huo & Hongying Lin & Yanan Meng & Peter Woods, 2021. "Institutional investors and cost of capital: The moderating effect of ownership structure," PLOS ONE, Public Library of Science, vol. 16(4), pages 1-18, April.
    5. Niccolò Nirino & Enrico Battisti & Alberto Ferraris & Stefano Dell'Atti & Massimiliano Farina Briamonte, 2022. "How and when corporate social performance reduces firm risk? The moderating role of corporate governance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(6), pages 1995-2005, November.

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