Does leverage create or destroy value in the long run? A re-examination of Nissim and Penman (2001)

Purpose: This paper explores the crucial role of financial statement analysis for equity valuation, reaffirming and extending Nissim and Penman’s seminal findings (2001). Design and methodology: We use a worldwide dataset comprising 82,481 observations across 33 countries from 2005 to 2022 to provide updated benchmarks to Nissim and Penman’s (2001) findings and facilitate forecasting and valuation. Our methodol- ogy involves both cross-sectional and time-series analyses. The cross-sectional analysis aggregates financial ratios over all firms and years, while the time-series analysis tracks the median values of portfolios over successive five-year periods.

Findings: Our analyses reveal that value creation and growth dynamics are intricately linked, with performance metrics significantly influenced by operating and Financial Leverage. The median Return On Common Equity (ROCE) and Return on Net Oper- ating Assets (RNOA), spread, and net borrowing costs collectively indicate a generally positive leverage effect on firm returns. Additionally, our findings demonstrate the im- portance of differentiating between operating and financing assets and liabilities when assessing Financial Leverage.

Contribution: Overall, the findings contribute valuable insights for managers and ac- ademics. They offer a deeper understanding of how leverage affects firm performance, which can inform strategic decision-making to enhance value creation. This paper extends the empirical foundation for equity valuation and financial forecasting, providing relevant benchmarks for financial analysis.