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Analyzing the Relationship Between Profitability and Leverage

Research Methodology

After covering the literature review section, I will now move to the quantitative scrutiny of the relationship between profitability and leverage. I will test the explanatory variables that I have presented in the subsequent pages using a framework of both random and fixed effects.

Secondary Data

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Secondary data is the main source of data that was used in this dissertation. This is published information that has been availed to the general public. I gathered financial ratios from the yearly reports of corporations that are listed on the stock exchange market of Mauritius (SEM). Most of this data was collected from the fact book and handbook on SEM’s official webpage. More information was collected from the office the internet and the Registrar of companies.


The 2011 version of Stata was used in this study.

Sample Design

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The sample in this study comprises of 37 firms. Owing to the fact that the size of Mauritius’s capital market is limited, all the companies that are listed on this market are put into consideration. The reason is that the listing expectation that underlie the registration of any company on the official stock market comprising of its issuance of shares to the general public, company size in terms of its market capitalization, and that the firm should have an excellent track record when it comes to running its business activities, has to furnish supporting documents that prove that the firm is not being established as a frontage, and has to produce its audited accounts to make the data more reliable and furnished. Any listed company has to comply with the stringent regulations and rules and are monitored closely with the Financial Services Commission. Consequently, it can be argued that all companies listed on this official market and incorporated in our sample are exposed to similar treatment.

Sample Selection

The population comprises of companies that are trading in various sectors in the economy namely mutual funds, industry, transport, leisure, sugar, investment, commerce, and the finance sector (insurance companies and banks). Some corporations were excluded because there was no accessibility to their annual reports for the period running from 2005 to 2009. After screening organizations that have available data for the given test period, the sample size is reduced from 47 to 37. The domestic currency was used in recording all the figures which is the Mauritius rupees. Those firms that published their accounts in any foreign currency had to convert them back to the Mauritian rupee using the prevailing exchange rate at the end of every period.

Regression Models for Panel Data

For the sake of this dissertation, I will make use of the econometrics methodology that is referred to as panel regression. Some of the most recent studies that have used econometrics include Ozkhan (2001) and Kremp et al (1999). It is paramount to differentiate the type of data that is being collected before deciding on the applicable technique. In this case, we made use of panel data that is also referred to as longitudinal or micro panel data. This is the same as cross sectional firm (unit) will be evaluated across a period of five years. The use of panel data comes with so many advantages. This allows us to keep stock of the element of time and take stock of space which are important parameters in finance.

Companies are not homogenous and the benefit of using this form of empirical data is that they put the unique attributes that each firm displays into consideration.