Abstract

This research aims to investigate the impact of leverage on the performance of small and large publicly listed firms in New Zealand. Further, it explored the moderating effect of agency costs on the association between leverage and firm performance. The research sample includes quarterly data from New Zealand firms from 2010 to 2021. To test the hypotheses, univariate and multivariate methods were used, such as correlation and panel data regression. The empirical results show that leverage has a significant positive impact on the performance of small firms, but a negative impact on their market value. In large firms, the opposite trend occurs, with firms having a higher market value when they have a higher level of debt in their capital structure. Additionally, the findings show that agency costs have a considerable impact on the relationship between leverage and firm performance. Regardless of the size of the firm, the market value and performance of firms improve when agency cost is introduced as a moderating variable. This study supports the theory that agency costs contribute to enhancing firms’ market value by allowing managers to allocate their discretionary spending to more profitable, value-enhancing projects, leading to fewer agency conflicts. The insights can be instrumental in improving the overall performance of firms by achieving an optimal debt structure and utilising debt effectively.

Keywords:
Agency problems, agency costs, leverage, corporate performance, market value.

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