The Level of Leverage in Quoted Companies and Its Relation to Various Economic Factors

15/12/2010 |  Azoulay Eddy, Sharabany Ran
All Press Releases In Subject:
The Financial Markets and Financial Stability

  • The accepted index of an economy’s macroeconomic and financial stability is the extent
of leverage among firms in the private sector or, in other words, the scope of activity that
is financed by liabilities other than internal sources. This study examines the trend in
leverage among publicly-traded companies in Israel for the period 1995–2006 and the
relative importance of various factors in explaining it. The data are taken from the
quarterly financial statements. The findings are as follows:
  • Publicly traded companies preferred to finance their activity through debt and this
tendency became more pronounced during the sample period. Thus, average
leverage (defined as a firm’s ratio of liabilities to balance sheet assets) rose from
about 55 percent in 1995 to about 65 percent in 2006.
  •  Publicly traded companies chose to increase their leverage primarily by issuing
bonds on the Tel Aviv Stock Exchange. The financial reforms, whose
implementation accelerated at the beginning of the decade, enhanced nonbank
financial intermediation in the provision of credit to the business sector and
encouraged the growth in bond issues.
  • The rate of leverage was characterized by significant variation between firms
according to industry. For example, real estate companies used debt to finance
their activity to a much greater extent than the average for all industries while
investment and commercial companies chose a level of debt that was somewhat
higher than average.
  • A set of ten variables, out of a group of more than thirty that were chosen, was
found to be significant in explaining the variation in rate of leverage between
firms. Thus, for example, it was found that larger, more stable and faster-growing
firms chose a higher rate of leverage while firms with high operating profit tended
to preserve their profit and thus increase their internal sources of financing and
reduce their rate of leverage.
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