Impact of Financial Leverage on Cash Flow Ratio: A Comparative Study Between MNCs and Domestic Companies Listed on DSE

Financial structure decisions have strategic role on owners’ welfare and also on survival of companies. Every company is supposed to maintain its optimum capital structure, although its measurement is very difficult. Based on secondary data the study intends to analyze and compare the impact of financial leverage on cash flow ratio of Multinational Companies (MNCs) and domestic companies listed on the Dhaka Stock Exchange (DSE) over a period of 20 years starting from 1996 to 2015. A total of 14 companies consisting of seven MNCs and equal number domestic companies were selected as sample from six industrial sectors. The explained variable of the study was Cash flow ratio (CFR), whereas the explanatory variables were indicators of financial leverage such as: Debt to assets ratio (TD/TA), Debt to equity ratio (TD/SE) and Debt to capital employed ratio (TD/CE). The study has found that Debt to asset ratio is positively related but Debt to equity ratio is negatively related with CFR in domestic companies. A mere 1% increase in Debt to asset ratio and Debt to equity ratio result in 0.501% increase and 0.03% decrease of CFR respectively. In MNCs, unlike domestic companies, Debt to asset ratio is negatively related, whereas Debt to equity ratio is positively related with CFR. For 1% increase of Debt to equity ratio, CFR decrease by 1.5% and vice-versa. On the other hand, for 1% increase in Debt to equity ratio, CFR increases by 0.0039% and vice-versa. The study concludes that financial leverage ratios have significant influence on cash flows of domestic companies but not on cash flows of MNCs in Bangladesh.