Financial leverage and earnings volatility: a cross-regional analysis of corporate financial stability

This thesis examines the relationship between financial leverage and earnings volatility through a cross-regional analysis of corporate financial stability. The main objective is to understand whether firms with different levels of indebtedness present different levels of earnings volatility and whether this relationship varies across geographical areas. Earnings volatility is measured through both ROA volatility and ROE volatility, in order to capture asset-based and equity-based dimensions of corporate performance stability. The empirical analysis is based on an original dataset constructed using firm-level financial data collected from Bloomberg. The sample includes companies operating across seven geographical areas: Africa, Asia excluding India, Europe, India, Latin America, North America and Oceania. The study follows three main steps. First, descriptive statistics are used to examine the composition of the sample and the main financial characteristics of firms across geographical areas. Second, analysis of variance is applied to test whether average levels of financial leverage and earnings volatility differ significantly across regions. Third, Ordinary Least Squares regression models with a moderator are estimated to assess whether financial leverage is associated with earnings volatility after controlling for firm-specific characteristics such as size, profitability, growth opportunities and sector. Interaction terms are included to test whether geographical area moderates the leverage-volatility relationship. The results show that firms differ across geographical areas in terms of leverage and earnings volatility. The main OLS findings indicate a negative association between leverage and ROA volatility, while the robustness checks reveal a positive association between leverage and ROE volatility, especially when leverage is measured through debt-to-equity. These findings suggest that financial leverage may be associated with lower asset-based volatility, while amplifying the volatility of returns to shareholders. Overall, the thesis highlights that the relationship between leverage and earnings volatility is complex and depends on the volatility measure adopted, while geographical differences appear more relevant for average volatility levels than for the intensity of the leverage-volatility relationship.