Thesis (PhD) - Cyprus International University. Institute of Graduate Studies and Research Accounting and Finance

Japan is widely regarded as one of the world's most advanced nations. The country's
electronics industry, in particular, is consistently ranked among the global leaders in
innovation. Industries such as automotive, construction, electronics, metal
manufacturing, and telecommunications have traditionally leaned more heavily on
debt financing for both their day-to-day operations and investment endeavors, rather
than relying on equity financing. In Japan, debt financing is favored as a cost-effective
source of capital when compared to equity financing.
The study aimed to determine the effect of financial leverage on the financial
performance of Japanese firms. The study selected 257 automotive, construction,
electronic, metal, and telecommunications companies between 2000 and 2021. To find
the effect of financial leverage on financial performance, the study used the random
effect and the GMM to estimate the effect of the firms' leverage on financial
performance. It was found that interest coverage has a positive and statistically
significant effect on ROA, ROE, and Tobin's Q. It was discovered that cash coverage
has a positive and statistically significant effect on ROE. The investigation revealed
that debt service obligations have a negative and statistically significant effect on
financial performance.
Coverage ratios, including assets coverage, cash coverage, interest coverage, and
annual debt service ratio, provide insights into a firm's financial health and stability.
The coverage ratios are crucial for assessing the risk exposure of non-financial firms,
and effective risk management involves evaluating the company's capacity to service
its debt, maintain liquidity, and mitigate financial distress. The impact of coverage
ratios on financial performance contributes to developing policies that enhance
financial stability and reduce systemic risks within the non-financial sector. Insights
into how coverage ratios impact financial performance guide firms in optimizing their
capital structure, managing debt levels, and making informed decisions about
investment and financing activities.
Maintaining adequate cash coverage is crucial for liquidity management, where
financial managers focus on strategies to ensure sufficient cash reserves to cover shortterm
obligations. Monitoring and controlling interest expenses are essential for
improving the interest coverage ratio. Managers explore opportunities to negotiate
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favorable interest rates, refinance debt when beneficial, and strategically manage the
company's capital structure to minimize interest burdens. Financial managers develop
comprehensive debt service planning, which includes aligning debt repayment
schedules with cash flow patterns, exploring debt restructuring options, and ensuring
that the company comfortably meet its debt obligations. Financial executives and
managers navigate the complexities of financial management, optimize coverage
ratios, and contribute to the financial health and performance of non-financial
institution firms in the Tokyo Stock Exchange.