The Effect of Financial Leverage on Shareholder’s Return: A Moderated and Mediated Model

Abstract

This research paper analyzes the impact of financial leverage on shareholder returns in Pakistan's real estate sector. This study considers the mediating role of cash holdings and the moderating effect of lending rates. It addresses a research gap by focusing on how these financial strategies affect small real estate firms, mainly during economic uncertainty caused by COVID-19. Theoretical idea is established from the agency cost concept (conflict on risk preferences). This concept indicates that conflicts between managers and shareholders on financial strategies (debt and cash management), significantly impact returns on equity (ROE). The findings confirm three key hypotheses, considering a sample of seven small-sized firms listed on the PSX from 2018-2022: financial leverage has an insignificant direct impact on ROE, cash holdings mediate the relationship between financial leverage and ROE, and lending rates moderate this relationship. The study contributes to the agency cost theory by explaining how strategic financial planning affect ROE in the real estate sector. This offers practical implications for firms to enhance their financial planning and strategic decision-making by exchanging valuable information in proper meetings and workshops. This study provides insight for policymakers, investors, and managers. To enhance financial strategies in the context of Pakistan’s real estate market. Even though limitations are present, like small sample size and specific industry. Further research should consider larger samples, different industries, and different mediators and moderators to further upgrade the findings.