Impact of Leverage on Valuation of Non-Financial Firms in India under Profitability’s Moderating Effect: Evidence in Scenarios Applying Quantile Regression

Reviewer 1 Comments

Sr.no

Reviewer comments

Authors Response

 English language fine. No issues detected

Thank you very much.

Does the introduction provide sufficient – Yes

Thank you very much.

background and include all relevant references? – Yes

Thank you very much.

Are all the cited references relevant to the research? – Yes

Thank you very much.

Is the research design appropriate? – Yes

Thank you very much.

Are the methods adequately described? – Yes

Thank you very much.

Are the results clearly presented? – Yes

Thank you very much.

Are the conclusions supported by the results? – Yes

Thank you very much.

Reviewer 2 Comments

Sr.no

Reviewer comments

Authors Response

Minor editing of English language required

Thank you very much for your valuable suggestions. We have now updated the manuscript, accordingly.

Does the introduction provide sufficient background and include all relevant references? – Can be Improved

Updated accordingly.

Are all the cited references relevant to the research? - YES

Thank you very much.

Is the research design appropriate? - YES

Thank you very much.

Are the methods adequately described? - YES

Thank you very much.

Are the results clearly presented? - YES

Thank you very much.

Are the conclusions supported by the results? – YES

Thank you very much.

The study acknowledges its limitations. It focuses only on non-financial firms listed in India, excluding financial firms due to their different reporting practices and work culture. How could it be extended?

The research is confined to the Indian economy, so the results cannot be generalized. To which economies could it be applied?

Thank you very much for pointing this out. The conclusion section is now updated, accordingly.

The quality of English is good, the ideas are presented clearly.

Thank you very much for your kind words.

Reviewer 3 Comments

Sr.no

Reviewer comments

Authors Response

Does the introduction provide sufficient -Can be Improved

Thank you very much for your valuable suggestions. We have now updated the Introduction as per the reviewer’s suggestion.

background and include all relevant references? – Yes

Thank you very much.

Are all the cited references relevant to the research? – Must be Improved

Updated accordingly.

Is the research design appropriate? – Can be Improved

Updated accordingly.

Are the methods adequately described? – Yes

Thank you very much.

Are the results clearly presented? – Can be Improved

Updated accordingly.

Are the conclusions supported by the results? – Can be Improved

Updated accordingly.

The objective of this research is to construct a model that investigates the connection between the company's financing structure/debt ratio and its evaluation, both directly and through the mediating influence of profitability. A variety of financial indicators had been employed to measure the variables under investigation.

Variables used in the Indian context are consistent with the relevant literature, and the methodology had been structured efficiently particularly quantile panel data regression using as well as the additional robustness test.

Thank you very much for your valuable suggestions. We have now updated the manuscript as per the reviewer’s suggestions.

Structural notes

·        The review of previous studies section is similar to the hypothesis development section, and both include repetition of explanation and details. It would be better to merge both sections into one.

·        Based on the author's claim, the current research is the first to deal with the mediating role of profitability in the proposed model. Are there any previous papers that dealt with the mediating role of other variables? It can be referred to in the research.

·        The use of the control variables needs references based on previous literature.

·        Is it possible to indicate that which measure of company evaluation was more reliable as a dependent variable in the proposed model?

·        Is there a statistical or economic justification for the significance in the different quantiles 10%, 50%, and 90%?

·        In the interactive model, it is not indicated how to calculate the variable (ϴ3i_DR_NPMit). Is it the result of both variables multiply?

·        In contribution and implications part, the portfolio diversification could be a fit implication of the research findings.

According to the reviewer’s suggestions, we have now updated the manuscript by incorporating all their comments. The updates are highlighted in yellow in the manuscript (including literature review, methodology, results, and discussion sections).

Reviewer 4 Comments

Sr.no

Reviewer comments

Authors Response

English language fine. No issues detected

Thank you very much

Does the introduction provide sufficient background and include all relevant references? - Must be Improved

Thank you very much for your valuable suggestions. We have now updated the Introduction as per the reviewer’s suggestion.

Are all the cited references relevant to the research? - Can be Improved

Updated accordingly.

Is the research design appropriate?- Yes

Thank you very much

Are the methods adequately described? ?- Yes

Thank you very much

Are the results clearly presented? - Yes

Thank you very much

Are the conclusions supported by the results? - Yes

Thank you very much

Reviewer 1 Comments

Sr.no

Reviewer comments

Authors Response

 Moderate editing of English language required

Thank you very much for the valuable suggestions to improve this paper. Now the paper is improved accordingly.

Does the introduction provide sufficient – Must be Improved

Updated

background and include all relevant references? – Must be Improved

Updated

Are all the cited references relevant to the research? – Must be Improved

Updated

Is the research design appropriate? – Must be Improved

Updated

Are the methods adequately described? – Must be Improved

Updated

Are the results clearly presented? – Must be Improved

Updated

Are the conclusions supported by the results? – Must be Improved

Updated

The paper estimates a quantile regression for log market cap and log asset value of nonfinancial firms on a set of explanatory variables, where debt ratio is the main variable of interest (plus other controls). Panel quantile regression is applied.

I feel that the paper has fallen short of the standards of the journal. The idea isn't well motivated at all- why is this topic interesting? If debt ratio matters at higher quantiles of log market cap or log asset,  is this surprising at all? Leverage can increase firm size as measured by these metrics, so the fact that the dependence between firm value and debt ratio at higher quantiles may not be interesting at all.

Thank you very much for pointing out this.

We understand your concern on this. However, we believe this is a novel findings with the application of quantile regression. We have explored existing literature discussing the relationship of leverage and firm's value. However, no study looks this relationship in scenarios as explored in current study. Mostly, it is suggested that inclusion of leverage in capital structure improves firm's value and have tax advantages.  

However, this is also true that leverage may decrease firm’s value as cost associated with inclusion of leverage in capital structure.

So increased leverage has its own repercussions. Hence, theoretically as well application of quantile regression is justified. 

Therefore, we believe that our findings are novel and gives more insights on leverage and firm’s value relationship. We have updated the same in discussion.

We look forward to any other suggestion (if any) to improve whatever we have done so that the issues raised by you could better be accommodated.

Second, panel quantile regression is employed, but it is not explained how. In the model, the fixed effects were not included. How were they treated? By penalization, or transformation? It would be useful to discuss this further.

Thank you for your valuable suggestion on this. We have now included section 4.3 to give reason for the adoption of this approach.

Reviewer 2 Comments

Sr.no

Reviewer comments

Authors Response

Does the introduction provide sufficient - YES

Thank you

background and include all relevant references? - YES

Thank you

Are all the cited references relevant to the research? - YES

Thank you

Is the research design appropriate? - YES

Thank you

Are the methods adequately described? - YES

Thank you

Are the results clearly presented? - YES

Thank you

Are the conclusions supported by the results? – YES

Thank you

The effect of firm leverage on firm performance or valuation is among the popular topics in the finance literature. However, since the legal regulations of each country and the way of doing business are different from each other, the relationship between leverage and performance is still being investigated by researchers. Therefore, the research topic is interesting and remarkable.

Thank you very much

The relationship between leverage and firm valuation in India is analyzed with applying quantile regression technique. This study also checks the effect of net profit margin as profitability indicators on the association between leverage and firm valuation (i.e., market capitalization).

Yes

The results indicate that there exists a positive association of leverage to assets only in higher quantile i.e., 90%), and a negative association of leverage is found with market capitalization in all quantiles. Under interaction impact, profitability variable does not influence the relation of leverage with asset but it negatively affects the association of leverage with market capitalization in middle (50%) quantile.

Yes

A comprehensive literature review is performed to identify the research hypotheses.

Thank you

Table 1 needs careful review and correction. The dependent, independent, moderate and control variables of the study should be clearly defined.

Thank you for giving your valuable suggestion. We have now improved it accordingly.

Table 2, where summary statistics are presented, should definitely be reviewed and variables shifted to the right should be taken to the left.

Thank you for suggesting this. We have now improved it.

The limitations of the study, policy recommendations and recommendations for future work should be considered in more detail.

Thank you for suggesting this. We have now improved it in Conclusion section.

n conclusion, I believe that this work has the potential to be published after minor corrections have been made.

Thank you very much

Reviewer 3 Comments

Sr.no

Reviewer comments

Authors Response

Minor editing of English language required

Thank you very much for your valuable suggestion to improve this paper.

Does the introduction provide sufficient -Yes

Thank you

background and include all relevant references? – Must be Improved

Updated

Are all the cited references relevant to the research? – Must be Improved

Updated

Is the research design appropriate? – Must be Improved

Updated

Are the methods adequately described? – Must be Improved

Updated

Are the results clearly presented? – Can be Improved

Updated

Are the conclusions supported by the results? – Must be Improved

Updated

ü  The paper is well written. Although the presentation and the proofreading could be further improved. 

Thank you for pointing this out. Now, the paper is updated accordingly.

ü  The paper’s title could be further revised and include the information regarding the Indian sample in the evidence section.

Thank you for the suggestion. It is now updated accordingly.

ü  The abstract needs to be revised, aims and contributions could be first discussed, followed by results, and more focus on finding and samples is needed.

Thank you for pointing out this. We have now updated Abstract.

ü  The literature must be expanded; for instance, for hypothesis 1, literature on debt ratio and capital structure theories could be added. I recommend you improve the general context of your research by including the following helpful resource in your paper: (Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms. Mathematics 2022, 10, 1119).

o   https://doi.org/10.3390/math10071119

Thank you very much for suggesting this. We have now updated the literature accordingly.

ü  Perhaps a table presenting each variable's definition, data source, and calculation/formula could also be added under the data description. The paper could gain a lot in terms of readability if some discussion on the sample, the measurement of the variables, and comparison with other studies could be added to the discussion and conclusion sections. 

ü  Methodology needs to be further improved. For instance, no information is provided about the constant and error terms and the reasons for not including them in the model specifications. Furthermore, more explanation of the QPDR model needs to be added. Hence, the main text should describe the chosen statistical method and the logic behind the method selection. 

ü  It would be essential to see some robustness/sensitivity checks beyond what the authors have done. For example, has any robustness check been done to confirm the validity of the findings?

We have mentioned the Table 1 for the discussion of the variables.

We have taken direct data from the source for each variable. Therefore, it doesn’t require any formula. However, the description of variables is provided in the definition. All variables’ data is retrieved from single source i. e., Bloomberg database. And the same is mentioned in Data section.

We have now updated the methodology with proper reasoning of adopted approach. We have now added a section 4.3 for the same.

After exploring the existing literature, we have followed the multimodel approach by incorporating different proxies of the dependent variable. Additionally, we have also considered linear, nonlinear and interaction models to obtain the relationship of leverage and firm’s value. Furthermore, the adoption of quantile regression also looks for their relationship over different quantiles. Hence, we believe that we have performed enough robustness check to confirm the reliability of the outcomes.

The conclusion needs further improvement, and more discussion on the research limitation and policy implications is required.

Thank you very much for suggesting this. We have now updated it accordingly.

ü  I wish you the best of luck.

Thank you very much.

Reviewer 4 Comments

Sr.no

Reviewer comments

Authors Response

Moderate editing of English language required

Thank you very for your valuable suggestion to improve this manuscript.

Does the introduction provide sufficient- Must be Improved

Updated

background and include all relevant references? - Must be Improved

Updated

Are all the cited references relevant to the research? - Must be Improved

Updated

Is the research design appropriate?- Can be improved

Updated

Are the methods adequately described? ?- Can be improved

Updated

Are the results clearly presented? - Must be Improved

Updated

Are the conclusions supported by the results? - Must be Improved

Updated

1. The authors are not familiar with the latest developments in the field of capital structure

1.     Brusov, P.; Filatova, T.; Orekhova N. (2023) The Brusov–Filatova–Orekhova Theory of Capital Structure: Applications in Corporate Finance, Investments, Taxation and Ratings, Springer Nature, 769 pp.

2.     Brusov, P.; Filatova, T.; Orekhova N. (2022) Generalized Modigliani–Miller Theory:              Applications in Corporate Finance, Investments, Taxation and Ratings, Springer Nature, 362 pp.

3.      Brusov, P.; Filatova, T.; Orehova, N.; Eskindarov, M. (2018) Modern Corporate Finance, Investments, Taxation and Ratings, 2nd ed.; Springer Nature Publishing: Cham, Switzerland, pp. 1–571.

4.     4.       Brusov, P.; Filatova, T.; Capital Structure Theory: Past, Present, Future; Mathematics 2023, 11(3), 616; https://doi.org/10.3390/math11030616

Thank you very much for suggesting these paper. We have gone through these researches and improved our manuscript.

. Their conclusions contradict the obvious notions that leverage is useful at low levels, increasing the value of the company and reducing the value of the company at high levels.

We have improved our literature review and theoretical background accordingly. In addition, we have also improved the discussion of our findings in relation to the suggested literature.

Concerning “However, the findings does not support modern capital structure theory (Modigliani and Miller, 1958). It is to be noted that a positive impact of leverage on assets are found only at higher quantile (90%ile). It also support Modigliani and Miller (1963) for their advanced theory indicating that leverage does not carry tax shield benefit instead it incurrs cost in leverage”.

-Modigliani and Miller theory is out of date and was replaced by BFO theory 15 years ago.

-In Modigliani and Miller theory debt financing increase company value at any leverage level.

We have now improved the literature review and Discussion section in relation to BFO theory as well. Thank you very much for this valuable suggestion.

conclusions should be reconsidered and deviation from the results of high theory (BFO and Modigliani and Miller ) should be done

Thank you for suggesting this. The conclusion section is now improved accordingly.

Reviewer 5 Comments

Sr.no

Reviewer comments

Authors Response

Moderate editing of English language required

Thank you very much for suggesting this to improve this manuscript.

Does the introduction provide sufficient- Can be improved

Updated

background and include all relevant references? - Can be improved

Updated

Are all the cited references relevant to the research? - Can be improved

Updated

Is the research design appropriate? - Can be improved

Updated

Are the methods adequately described? - Can be improved

Updated

Are the results clearly presented? - Can be improved

Updated

Are the conclusions supported by the results? - Can be improved

Updated

The main findings of the study is that there is positive relationship of DR (debt ratio)  and net profit margin only in higher quantile i.e., (90%ile), and  that there a negative association of DR is found with market capitalization in all quantiles. In general, the study  found that leverage is detrimental for firm’s value while the firm has higher profitability. The main concern of the study is with regard to the measurement of firm value. If you use alternative measures of firm value like ROA, ROE, TobinQ, Enterprise Vaue, will the result hold? One would like to see the robustness of the results based on these measures.

Thank you much for suggesting this. Respectfully, I would like to inform that this study looks for impact of leverage on firm’s value. We have taken the most suitable proxies of firm’s value for the purpose after exploring the detailed literature review.

We would like to submit that the suggested variables ROA, ROE, Tobin's Q are the more suitable (except Tobin’s Q) measures of firm’s profitability.

Therefore, we believe that it will not be a suitable approach to confirm robustness using them. We have used two approaches to do the same.  

However, we have noted your suggestion regarding these variables and believe that these would be of use in the future scope on the topic.

What is the coverage of 66 firms in NSE 100/500 in terms of market capitalisation?

Thank you very much for suggesting this. We have now added the coverage of 76 sample firms for overall BSE  100 listed firms capitalization.

 Industry-wise distribution of the sample is required.

Thank you very much for suggesting this. We have now added Table A in appendix for industry wise distribution of sample.

Reviewer 4 Comments

Sr.no

Reviewer comments

Authors Response

Moderate editing of English language required

Thank you very much for your valuable suggestion.

Does the introduction provide sufficient background and include all relevant references? - Yes

Thank you

Are all the cited references relevant to the research? - Yes

Thank you

Is the research design appropriate?- Yes

Thank you

Are the methods adequately described? ?- Can be improved

Updated now

Are the results clearly presented? - Can be improved

Updated now

Are the conclusions supported by the results? - Yes

Thank you

The authors have improved the paper and accounted the reviewer comments.

Now I can recommend paper for publication.

Thank you very much for your recommendation.

Reviewer 5 Comments

Sr.no

Reviewer comments

Authors Response

Moderate editing of English language required

Thank you very much for your valuable suggestion. We have improved it now.

Does the introduction provide sufficient- background and include all relevant references? - Can be improved

Introduction has been updated now.

Are all the cited references relevant to the research? - Can be improved

Updated now.

Is the research design appropriate? - Can be improved

Updated now.

Are the methods adequately described? - Can be improved

Updated now.

Are the results clearly presented? - Can be improved

Updated now.

Are the conclusions supported by the results? - Can be improved

Updated now.

The authors have not carried out my major comments which is given below. The authors have disagreed with my comments. I am not in a position to approve its publication. The main findings of the study is that there is positive relationship of DR (debt ratio)  and net profit margin only in higher quantile i.e., (90%ile), and  that there a negative association of DR is found with market capitalization in all quantiles. In general, the study  found that leverage is detrimental for firm’s value while the firm has higher profitability. The main concern of the study is with regard to the measurement of firm value. If you use alternative measures of firm value like ROA, ROE, TobinQ, Enterprise Vaue, will the result hold? One would like to see the robustness of the results based on these measures.

We really apologize for this. We did not mean to disagree with your comment. We had just informed to carry your suggestion in the future scope of this study. However, we have now updated our study by further adding the analysis of two more proxies of firm value as the reviewer suggested. The Appendix gives detailed discussion of additional analysis. We have found similar outcomes in this analysis as found in our main analysis.

Thank you very much for giving this valuable suggestion to further improve this paper.