The effect of debt on corporate profitability : Evidence from French service sector

TL;DR

This study investigates the relationship between debt and profitability in French service sector firms, finding no significant effect of debt ratios on profitability across different company sizes using GMM analysis.

Contribution

It provides new empirical evidence on debt-profitability dynamics in French service companies, applying GMM to analyze multiple profitability measures.

Findings

Debt ratio has no effect on profitability.

Results consistent across firm sizes.

Uses panel data and GMM econometric technique.

Abstract

Current study aims to provide new empirical evidence on the impact of debt on corporate profitability. This impact can be explained by three essential theories: signaling theory, tax theory and the agency cost theory. Using panel data sample of 2240 French non listed companies of service sector during 1999-2006. By utilizing generalized method of moments (GMM) econometric technique on three measures of profitability ratio (PROF1, PROF2 and ROA), we show that debt ratio has no effect on corporate profitability, regardless of the size of company (VSEs, SMEs or LEs)