The Link between Profitability and Financial Leverage, Evidence from a Small Island Economy

Abstract

The objective of this paper was to investigate the link between profitability and financial leverage in Mauritius, a small island developing economy. For the purpose of this study data was collected from a sample of 34 companies listed on the Stock Exchange of Mauritius (SEM) for period 2007 to 2017. The pecking order theory, the modigliani and miller theory, the trade-off theory and the agency theory were used to examine the association between profitability and financial leverage in Mauritius. The findings of this research reveal a positive link between profitability and financial leverage of Mauritian listed companies. This positive relationship is consistent with the modigliani and miller theory, the trade-off theory and the agency theory. This research also reveals a negative link between firm size and profitability. This study also shows that there are no significant relationships between liquidity and profitability and between growth opportunities and profitability of Mauritian listed firms.