Leverage and Corporate Performance: Fresh Insights into the Role of Firm Size and Threshold Effects in Saudi Arabia

Abstract

This study explores the leverage-company performance relationship, focusing on company size as a potential threshold variable. Using the Hansen threshold model, a sample of 126 Saudi companies listed on the stock exchange from 2010 to 2022 was analyzed to investigate whether company size influences the leverage-performance relationship. Contrary to initial expectations, the find-ings reveal no threshold impact of company size on this relationship. Across large as well as small companies, leverage consistently has a negative effect on performance, measured through return on assets (ROA) and return on equity (ROE). These results suggest that company size does not alter the negative impacts of leverage on performance. The study provides valuable insights for company managers, emphasizing the need for cautious use of debt across companies of all sizes. Additionally, it highlights the broader implications for policymakers, particularly in fostering a supportive economic environment with lower interest rates and more developed capital markets to mitigate the adverse impacts of leverage on company growth.