IMPACT OF FINANCIAL LEVERAGE ON THE PERFORMANCE OF TOURISM FIRMS IN THE MENA REGION

Abstract

Purpose – Leverage refers to the use of borrowed capital to finance investment projects. The question of how much debt is optimal for a firm has always been challenging for business managers and scholars alike. Most empirical studies have tried to achieve this, but no conclusive findings have been produced yet. The debt-equity balance changes with the industry, and what is optimal for one industry may not be so for another. Our study aims to determine the impact of leverage on the financial performance of tourism firms in the MENA region. Methodology – To this purpose, we have collected data from a sample of 71 listed firms from the tourism sector. We have employed pooled and static panel regression, using published financial information from 2010 to 2021 in the MENA region. We obtained an unbalanced and cross-sectional panel of 768 firm-year observations from the 71 firms used in the study. Findings – The findings reveal that leverage represented by the debt ratio and equity ratio has a significant negative impact on the financial performance of tourism firms represented by ROA and ROE. Conclusion – The implication of the study findings is that debt levels beyond a certain level can be detrimental to firm performance. Consistent with the trade-off theory, managers must carefully balance the advantages and disadvantages of borrowings over their own capital.

Keywords

• MENA
• tourism industry
• performance
• profitability
• leverage
• capital structure

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