Value-Relevance of Changes in Financial Leverage For Explaining Operating Performance

Abstract

The operating performance of a firm is not directly observable. The earlier researches have shown that criteria such as accounting earnings and cash flows are representatives of unobservable aspects of operating performance. The purpose of this study is to indicate whether changes in financial leverage can help us in evaluating performance. This study deals with a different dimension of traditional view that considers financial leverage as a criterion of risk assessment. The method in this research is based on regression analysis to determine the relationship between changes in financial leverage and stock return of a firm regarding as a representative of operating performance of the firm. The statistical population of this study consists of companies accepted in Tehran Stock Exchange in 1378 to 1388. The results of this research indicate that changes in financial leverage provide more information than what is available through traditional criteria. The information content of changes in financial leverage is incremental in comparison with accounting earnings, operating cash flows, and accruals. Although the focus of this study is on the current return, the impact is extended to the next period, because the market does not understand the information content of changes in financial leverage in time.

Keywords

• changes in financial leverage
• operating performance
• stock return
• value relevance