Role of Cash Flows in Firm-Level Leveraged Returns within Industry in Bursa Malaysia

Abstract

This study examines the role of cash flow in the financial leverage-stock return nexus in Bursa Malaysia. The analysis, as conducted, is based on 12 sectors, and covers a sample of firms from the period 1986-2012. Panel regressions show that industry-specific analysis matters due to various marginal effects of leverage conditional on cash flow across sectors. Data relating to cash flow from operating activities, cash flow for capital expenditure, and free cash flow are employed. The results suggest that each adopted cash flow exhibits an important role in affecting the leverage impact on returns in most of the sectors. In most circumstances, leverage is deemed counter-productive under the existence of cash flow. The results are robust to market and book measures of leverage, net or inclusion of cash position, and to dynamic estimation. The conditional leverage impacts remain robust even though the firm effects and time effects are present in the model specification as controls.