Financial Economics
Vahid Taghinezhadomran; Zahra Mila Elmi; Fatemeh Zahra Husseinpor
Abstract
Banks have a considerable ability to use financial leverage compared to non-bank firms to earn high profits and returns with support of the central bank as a last resort lender. The ability of banks to use leverage depends on internal characteristics such as size, profitability and risk, as well as environmental ...
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Banks have a considerable ability to use financial leverage compared to non-bank firms to earn high profits and returns with support of the central bank as a last resort lender. The ability of banks to use leverage depends on internal characteristics such as size, profitability and risk, as well as environmental variables such as inflation, which affect the Business cycle. This study aims to find the effects of these variables on the dependency of banks on financial leverage in recession and booms periods. To this end, Hodrick-Prescott filter was used to extract business cycles. The Generalized Method of Moments (GMM) based on the data from 18 Iranian banks during 2005-2018 was used in order to test the research hypotheses. The results show that larger banks are more inclined to leverage and economic conditions have no significant effect on this desire. Banks with better financial stability and less risk rely on lower financial leverage in times of economic prosperity. The effect of profitability criteria on the leverage of banks depends on economic conditions. In times of economic prosperity, banks with better profitability have a higher incentive to leverage. Also, how the inflation affects the financial leverage of banks depends on the economic conditions. During an economic boom, inflation encourages more reliance on leverage in banks.
