Influence of Financial Leverage on Shareholder Return in Germany

Influence of financial leverage on shareholder return and market capitalisation in Germany - did the COVID-19 pandemic change the game

List of abbreviations

FDI: Foreign Direct Investment

GDP: Gross Domestic Product

List of Figures

Introduction

The presented chapter introduces the research subject and its related aspects. The term financial leverage is the use of debt (borrowed money) to finance the purchase of assets and organisations borrowed money with the expectation that capital gain or income from the new asset purchased through debt will exceed the cost of borrowing. The person who provides the money or debt provider will put a limit on how much risk it is ready to take. Debt providers use the assets as the collateral as in case the borrower is unable to return the money, debt provides can sell the collateral asset in return for money. According to Poursoleiman et al (2020), leverage is employed to enhance the return on equity. The formula of financial leverage is measured as the ratio of total debt to total assets. Shareholder's return is the amount of return in return of the share invested that shareholders get and it is calculated pre-tax and assumes that all dividends are reinvested. Before buying the share of any organisation, individual or firm consider the amount of return they will get. However, shareholder's value is not the only thing that needs to be considered when purchasing the share of any company as it is also essential to use a number of valuation methods to assess the value and quality of the company. Investors make money from stock in two basic ways that are current income and capital gains (Lechner and Gatzert, 2018). Current income is the amount of dividend paid out but the company from its earnings and capital gain is the change in the market price of the stock from the time the share was purchased to the date it was sold. The impact of leverage on corporate investment decisions is one of the issues in financial management. The firm needs funds to operate successfully in the business environment.

The organisation makes use of financial leverages because it offers two primary benefits, first, it can enhance the earnings and second interest expenses is tax-deductible in many jurisdictions that reduce the net cost of borrowing debts. However, financial leverage is risky as well as the amount of interest expenses may overwhelm, the borrower if it does not earn sufficient income. The reason for using financial leverage may vary from individual to the firm because companies acquire the property and equipment with debt to increase the shareholders' value and individuals use leverage to enhance their investment returns (Olaniyan et al., 2020). The primary motive of the organisations is to magnify shareholders' returns under favourable economic conditions. When the difference between earnings generated by the assets that are financed by the fixed-charges funds the cost of these funds is distributed to the shareholders by which return on equity (ROE) and earnings per share (EPS) increases. A financial plan is one of the vital decisions because of the financial and shareholders' return of the firm (Lechner and Gatzert, 2018). Shareholders are expected to demand a higher return to compensate them for more financial risk as a firm decision to raise the level of leverage. The shareholder return depends on the efficiency of stock and shares of the organisation over a specific period.

Market capitalisation is the total dollar market value of an organisation's outstanding shares of stock. It is commonly known as market cap. Market capitalisation allows investors to understand the relative size of one organisation versus another and it measures what is the worth of the company on the open market. The average market capital value for Germany during the period 1975- 2020 was 887.25 billion US dollars with a minimum of $51.4b in 1975 and a maximum of 2284.11 billion US dollars in 2020 (The global economy, 2022). In the year 2021, the market capitalisation of Germany accounted for 62.0% of its nominal GDP compared with a percentage of 55.6% in the previous year (CEIC data, 2021). Financial leverage influences capitalisation as leverage leads to a change in volatility of stock return.

Stock market performance is at the peak before the COVID outbreak triggered a freefall in the share prices. The world has changed after COVID, transforming the economies, people's lives and the fortunes of our businesses with the ups and downs in the share price. According to Varghese and Haque (2021), the outbreak of the COVID-19 pandemic leads to an unprecedented slowdown in the global economy including the drop in the GDP of Germany as cash flow were heavily impaired in many industries that creating an influence on corporate insolvency. COVID-19 recession has created an impact on the capital structure of publically listed firms as credit flows to non-financial remain robust through drawdowns on the existing credit lines. However, the policy supports the Federal Reserve allowing most of the organisations to remain operational. During the COVID, the firm leverage declined by 5.3 percentage points and this was due to COVID related lockdowns. Firms' exposure to business risk has become over-leveraged after the COVID is sharpest deterioration in credit risk has been faced by those firms that are exposed to high business risk (Mishra and Dasgupta, 2019). This involves the risk of financial leverage as over-leveraged firms are most likely to default and unable to return the debt if growth slows down or they experience a further spike in risk. COVID-19 created a large macroeconomic shock to the revenue of the organisation their profit and bottom line income and in turn reduced their ability to fulfil debt (Bradley and Stumpner, 2021). Government intervention in the economies hit hardest by the outbreak of COVID as COVID led to sustainability cheaper credit and availability of great credit to the firms that may have taken the decision to take on new debt. This shows that businesses and firms in economies hit hardest by pandemic and may have decided to close the gap in leverages as soon as opposed to the firm's domiciles in economies. According to Varghese and Haque (2021), a negative effect on leverage ratio has been observed and firms are exposed to financial risk due to a significant reduction in leverage post-COVID. Firms were negatively exposed to financial risk after COVID that affected their ability to return the debt. The rising trend in leverage post-GFC shows that net debt/asset has risen from 10 to 22 per cent from 2007 Q to 2020 Q. This trend means leverage is similar, although it is marginally less pronounced and exhibits a cyclical behaviour since the GFC. IMF (2019) caution that the corporate credit cycle is enhanced due to easy financial condition as a result firms ready to take further financial risk and continue to the buildup of debt. United Nations Conference on Trade and Development (2020) stated that the GDP of Germany declined in 2020 as Germany earns a GDP of -4.9 per cent due to trade restrictions that affected the revenue and sales of the organisation. However, to bring the financial performance on track, organisations taking more debts but providing them leverage is riskier as businesses are already suffering from low revenue which shows businesses has the low capability to pay debts.

The outbreak of the COVID affected the financial leverage on shareholders' return and market capitalisation as the above discussion shows that influence on the business operation due to strict rules of COVID lockdown in Germany caused the decline in the financial leverage. The recessionary nature of the shock influenced default probabilities and by extension cost of distress has expected. COVID decreases the leverage level while debt maturity increased marginally. Thus it can be said that serious implications for systemic risk and financial stability should be taken since large organisations have the potential to generate a wave of defaults.

Aim

The aim of the dissertation is to analyse the financial leverage on market capitalisation and shareholder return and how the recent COVID-19 outbreak affected the financial leverage on market capitalisation and shareholder return. Slow cash flow and declining income reduced the organisations' ability to pay debts and account for low annual growth.

Objectives

• To analyse the effect of financial leverage on market capitalisation and shareholder return

• To evaluate the relation between financial leverage and shareholder return in Germany

• To examine the connection between financial leverage and market capitalisation in Germany

• To define the effect of COVID-19 on financial leverage, market capitalisation and shareholder return in Germany

• To understand the relation between COVID-19 and financial leverage and shareholder return.

Research Question

• How does financial leverage affect the market capitalisation and shareholder return in Germany?

• How shareholders earn increased returns due to financial leverage in Germany

• How does market capitalisation depend on the increased and decreased financial leverage in Germany?

• How did the recent COVID-19 outbreak impact the financial leverage in Germany?

• How the recent COVID-19 pandemic affected the market capitalisation and shareholder return in Germany.

(INTRODUCTION CHAPTER COMPLETED)

Literature Review

The presented chapter provides an introduction to the theoretical background of the research subject.

Financial leverage

The present market scenarios are robust and dynamic, making the businesses become ready to face the uncertainties. To keep the businesses ready to exploit the upcoming opportunities and balance their operations during the tough times, they seek different types of investments in their business for raising capital. Often, equity capital, invested by the owners, cannot suffice the capital needs and here comes the scope of bringing in debt capital as financial leverage to the business. As portrayed by CFI (2022), financial leverage is such capital that is borrowed from external sources for the acquisition of assets to enhance the resources available to it with an expectation that such resource or asset will generate better incomes or gains than the cost of making the borrowing. Financial leverage can be favourable and unfavourable to a business, depending on how efficiently it utilises its funds and assets. Akhtar et al. (2021) provide that financial leverage constitutes an important part of a business’ strategies with respect to its capital structure. The management is encouraged to perform better with the help of assets utilisation so that better incomes can be generated to overcome the borrowing costs.

Figure 1: Understanding financial leverage

Source: CFI, 2022.

As per Sax and Andersen (2019), financial leverage is directly associated with risks in a business enterprise and influences its performance. It serves as a measure while evaluating the responsiveness of the strategies applied towards risk management and reduction of financial distress. The authors further state that businesses tend to maintain lower financial leverage as it allows them to develop capital reserves needed to meet uncertainties and reflect a scope of raising additional capital. High financial leverage increases the risks of making defaults. Kling et al. (2021) address financial leverage as a measure of financial risk directly and state that high leverage depicts high indebtedness and ultimately higher risk. High risks and high costs often divert the business entities to seek other modes of capital generation to reduce financial leverage. CFI (2022) provides that financial leverage rings many types of risks to a business which may lead it to loss-making with a continuous decline in the value of the assets and constant interest charges on the capital borrowed. It says that the key risks attracted by it include the volatility of the stock prices occurring because of the frequent swings in the profitability of the business, propelling of the business towards bankruptcy with frequent fluctuations in the level of revenue causing an inability towards payment of debt obligations and even operating expenses and last but not the least, reduced accessibility additional debt as the lenders assess the existing level of financial leverage in the business for determining the risks of default.

Figure 2: Risks of financial leverage

Source: Own work

As portrayed by Nuryani and Sunarsi (2020), the analysis of the level of financial leverage in a business can be evaluated with the help of the debt to equity ratio which reflects the capital structure applied and debt included against equity invested. It reflects the potential of the business to pay off the long term obligations once they get mature and determine the limits of borrowing loans in the business. Nuryani and Sunarsi (2020) further explain that the debt to equity ratio reflects the solvency of the business stemming from the risks taken in the form of debt financing. The creditors seek the debt to equity ratio while studying the level of financial leverage to determine the amount of collateral available to them to ensure that the credit facilities extended by them will be paid off timely and fully. According to Amanda (2019), a higher level of debt to equity ratio depicts higher financial leverage and higher financial risks in the organisation which increases the chances of defaults and failures. Thus, the opposite level of debt to equity ratio is preferred.

Figure 3: Formula for debt to equity ratio

Source: CFI, 2022.

To study financial leverages further in current dynamic times, the debt to EBITDA ratio is another important metric. The ratio is often used by creditors and credit and rating agencies for determining the probability of default in respect of the debt facility extended by them. The ratio guides them by measuring the availability of profit to meet the debt services charges. Where such a ratio is higher, difficulties might arise while payment of the debt (Greenwald, 2019). However, it must be noted that implementation of the debt to EBITDA ratio is more fruitful when done in respect of large businesses or businesses with high margins. Applying it in the case of small businesses and businesses with low margins might not prove to be relevant as their earnings can be too volatile to not violate the limit of debt covenant limits. Thus, financial leverage must be studied accordingly (Greenwald, 2019).

Figure 4: Formula for debt to EBITDA ratio

Source: Ratiosys, 2021.

Market capitalisation

Market capitalisation is an important concept existing with respect to the measurement of the value of a company. According to Widiatmoko et al. (2020), the value of a company can be determined by multiplying the outstanding number of shares, i.e. the shares issued by the company, with the market price of such shares being traded in the stock market. Market capitalisation has attained the status of being an indicator accepted universally for valuation of the business carried out by the company. This indicator is analysed as one of the decisive factors by the investors Widiatmoko et al. (2020) further state that the growth of a company on the stock market can be measured by market capitalisation results. As presented by Kuvshinov and Zimmermann (2021), growth in market capitalisation can be evaluated on the basis of two metrics, i.e. growth in quantity or growth in prices. Growth in quantity refers to the increase in the number of shares outstanding caused by equity issuance, while growth in prices refers to the surge in the prices of the listed shares caused by different factors affecting such prices.

Figure 5: Market capitalisation

Source: Napkin Finance, 2022.

Market capitalisation is important for the investors for sorting companies on the basis of their size. Usually, there are three categories into which the companies are bifurcated, i.e. large-cap, mid-cap and small-cap. It gets easy to rank the potential investments using such bifurcation and rank them to make investment decisions, strategies, etc. The growth rate of the company and risks carried by it can be projected by analysing its market cap (Napkin Finance, 2022).

Figure 6: Different categories of market capitalisation

Source: Napkin Finance, 2022.

Kumar and Kumara (2021) reflect that market capitalisation is of significant importance for existing and potential investors who determine the same for making investment-related decisions. The value of a company is treated as a fundamental determinant by the investors and is studied with great interest. The authors further provide that the investors use market capitalisation to know the company’s market value, its growth potential and risks carried by it so that they can design their investment portfolio accordingly.

Figure 7: Formula for market capitalisation

Source: Stock Analysis, 2022.

It must be noted that the market capitalisation of a company cannot be determined unless it goes public and gets itself registered on the stock exchange to let its shares traded publically. The price of such shares is essentially driven by the demand and supply of the shares of the company. Favourable factors bring a surge to the prices, while the unfavourable factors push it towards decline (Kumar and Kumara, 2021). The relationship between the stock market and the economy of the nation is astonishing as the growth of the economy of the nation support the stock exchanges operating in the country favourably and lead to enhanced issue and trading of securities on such stock exchanges as the businesses are supported to flourish and go public. Thus, stock markets have been referred to as a good indicator or predictor of the level of growth of the economy (Kumar and Kumara, 2021).

Total shareholders’ return

Gordon (2021) presents shareholder return as the earnings drawn by a shareholder on the investments made by him in the capital of a company in lieu of shares. Total shareholders’ return is treated as performance metrics to determine the amount earned by the investor, i.e. shareholder, on the investments made by him in a company as a share of the earnings made by the company from its overall operations. Skillfin Learning (2022) discloses total shareholders’ return constitutes two important components, i.e. capital appreciation or capital gain and dividend yield. Both of these together serve as a return to the shareholders as an earning. Gordon (2021) provides that capital appreciation refers to the capital gain made by the shareholder concerning the differences between the market price of the shares and the purchase price of such shares. Baker et al. (2020) state that the dividend is the share of profits earned distributed by the company to its shareholders and dividend payout reflects the proportion of the overall profits distributed by the company as a dividend. Higher is the dividend yield, more satiated is the shareholder.

Figure 8: Constituents of total shareholders’ return

Source: Skillfin Learning, 2022.

The total shareholders’ return is significantly driven by two factors, i.e. changes in market capitalisation of the company and dividend yield. The market capitalisation of a company is essentially driven by the growth of net income of the company, including its revenue growth, leverage level, capital efficiency and cost reduction and changes in its price-earnings ratio. On the contrary, the dividend yield is driven by the company's desire to retain and reinvest its profits or share the same with the shareholders (Skillfin Learning, 2022).

Figure 9: Drivers of total shareholders return

Source: Skillfin Learning, 2022.

The main purpose of evaluating total shareholders’ return is to ensure that it is growing in the direction of enhancing shareholders’ overall wealth. Wealthy maximisation is the ultimate aim of the shareholders investing in the company. With the increased market capitalisation, their wealth is also enhanced. The company optimises the relationship between risks and returns influenced by its decisions concerning investment, financing and payment of dividends. This affects shareholders’ wealth (Khan and Hussanie, 2018).

Figure 10: Risk-return trade-off towards shareholders’ wealth maximisation

Source: Khan and Hussanie, 2018.

Total shareholders’ return proves beneficial to the investors as it assists them while analysing the performance of a stock, specifically in terms of return, over the time for which such stock is held. This return includes the addition of capital appreciation and dividends issued with respect to the stock. It is determined in terms of percentage (Gupta, 2022).

Figure 11: Formula for total shareholders’ return

Source: Gupta, 2022.

In the calculation of total shareholders’ return, current price refers to such existing price at which the stock is being traded at the stock exchange, purchase price reflects such price at which the stock was acquired by the investor and dividend refers to the amount of dividend declared by the company in respect of the concerned shares (Gupta, 2022). The investors determine the total shareholders' return and utilise it for a thorough understanding of the performance of the company's stocks and compare its performance with the stocks of the competitors so that apt decisions can be made (Gupta, 2022). However, total shareholder return reflects past information and the same does not reflect the upcoming performance of the same. Also, it does not take the cost of capital into consideration and thus, comparing returns prevailing in different periods is not feasible (Gupta, 2022).

Economy of Germany

Germany marks a strategic location in Western Europe. It is governed by the federal republic system of government which is chiefly held by the president and headed by the chancellor. Berlin is its capital city. It has a mixed economic system in the country where centralised economic planning takes place and the government inputs its regulations. The country is a member of the European Union which is one of the key highlights of its economy (globalEDGE, 2022). Germany is recognised as a high income earning developed country which ranks as the fifth economy in PPP terms globally (globalEDGE, 2022). It is the main exporter of items like machinery, chemicals, household equipment, vehicles, etc. in Europe. Its highly skilled labour force serves it as one of its key strengths. Its key trading partners include China, the United States and France (globalEDGE, 2022).

Germany had been mentioning a continuous growth in its gross domestic product (GDP) but faced a significant fall in the year 2020, mainly because of the COVID-19 pandemic which affected the country’s economy adversely. The growth rate of GDP in 2020 was marked at -4.57% with GDP per capita at $54,264 (globalEDGE, 2022).

Figure 12: GDP per Capita PPP of Germany

Source: globalEDGE, 2022.

Germany's GDP held the fifth rank worldwide. Its GDP mainly comprised of the service sector which contributed 63.31% to the overall GDP. Such contribution was followed by industry sector which contributed 26.53% and manufacturing sector contributed 18.17%. the least contribution to the GDP of the country was made by its agriculture sector which accorded 0.74% share in the total GDP (globalEDGE, 2022).

Figure 13: Composition of Germany’s GDP in %

Source: globalEDGE, 2022.

The economic indicators reflect that Germany has been putting effective control over inflation and trying to maintain the same at a low level so that economic growth can boost. The average real interest rate prevails in the country at 4.345%, while the total tax rate is marked at 48.8% of commercial profits (globalEDGE, 2022).

Figure 14: Economic indicators of Germany

Source: globalEDGE, 2022.

Germany understands the role of employment and labour development in its overall economic growth. Thus, it has been focusing on enhancing its labour forces and had been getting successful until 2019 but in 2020, its labour forces declined as an impact of the COVID-19 pandemic. The labour force of the country landed at 43,382,544 in 2020 (globalEDGE, 2022). The services sector offers the highest proportion of overall employment in Germany, i.e. 72.052% of total employment. This is followed by industry which serves 26.779% of the total employment. Lastly, the agriculture sector serves 1.169% of the total employment (globalEDGE, 2022). Until 2019, the unemployment rate of Germany was having a continuous fall but as the COVID-19 pandemic disturbed the country’s economy, its unemployment rate faced a steep surge (globalEDGE, 2022).

Figure 15: Labour and employment in Germany

Source: globalEDGE, 2022.

Investment activities in Germany

Investment activities hold critical importance for the economy of Germany. The investors attracted towards the building of a diverse portfolio with investments in different countries give vital attention to the country. The country attracts foreign direct investments at a large level and FDI stock in the country has been increasing continuously (Santander Trade, 2022). The country faced a significant economic shock with the spread of the COVID-19 pandemic as it caused economic disruptions and lead to a decrease in the level of FDIs. In 2020, the inflow of FDIs in the country was noted to be reduced by around 34% (Santander Trade, 2022). This caused the FDIs to land at USD 36 billion in 2020, which was as high as USD 54 billion in the last year (Santander Trade, 2022). The outward investment activities of Germany have also been affected adversely and the outflow of investments declined from USD 139 billion in 2019 to USD 35 billion in 2020 (Santander Trade, 2022).

The key investors directing FDIs to Germany come from the Netherlands, Luxembourg, Switzerland, the UK and the US (Santander Trade, 2022). These all cumulatively reflect more than 60% of the total stock. Other countries that showcase interests in making investments in Germany are France, Austria, Italy, Japan and Ireland. The FDIs are mainly invested in sectors like insurance and finance, information and communication, manufacturing and trade, real estate and management and consultancy activities (Santander Trade, 2022).

Figure 16: Main investing countries and invested sectors of Germany

Source: Santander Trade, 2022.

Germany’s location in Europe, its mighty industrial network, reliable infrastructure, highly skilled labour force fluent in English and welcoming social climate together make the key characteristics of the country and play an important role in attracting foreign investments (Santander Trade, 2022). However, it also holds certain drawbacks concerning high rates of taxation, high dependency on the automotive and mechanical industries and inflexible labour laws.

Figure 17: Foreign direct investment in Germany

Source: Santander Trade, 2022.

The investors are encouraged to invest in the key sectors of the national economy of Germany, such as consumer goods, subcontracted goods, advanced materials, pharmaceutical and chemical industry, aerospace industry, automobile industry, online trade, retail trade and whole trade, as these sectors reflect the availability of enormous opportunities for the investors (Santander Trade, 2022).

(LITERATURE REVIEW CHAPTER TO BE CONTINUED)

Methodology

Introduction

The presented chapter discusses the different aspects of the methodology applied for carrying out the concerned research work. To analyse the influence of financial leverage on market capitalisation and shareholders return in Germany and the impact of covid on the financial leverage will be performed using the relevant content and information using appropriate research methodology. Research methods refer to the specific process or procedure that the investigator uses to collect the appropriate information. This section of the dissertation allows the readers to critically evaluate the validity and reliability of the overall study. Saunders research onion will be used in the present study Sinha et al (2018) stated that the research onion illustrates the stages that are involved in the development of research work. Research onion will provide an effective progression through which a research methodology is designed. This study is based on secondary data and the methodology section specifically defines how the researcher systematically designs a study to ensure reliable and valid results that address the research objectives and aim.

Research philosophy

Interpretivism philosophy is used in the proposed study to interpret the element of the study as per this philosophy the research is based on the personal interest of the researcher and depends on how the researcher perform the study in the interested al field (Žukauskas et., 2018). Here, in the proposed study researcher is interested in analysing the influence of financial leverage on market capitalisation and shareholders returns in Germany and to analyse whether covid created any change in the financial leverage of Germany. This philosophy is applied as it is effectively applied in secondary data research and the present study is based on secondary data. The focus on the researcher using this philosophy is what is specific and unique to the research topic. However, the study depends on the interest and interpretation of the researcher and great room for bias on behalf of the researcher (Žukauskas et., 2018).

Research approach

Here, the study focuses on the financial leverage, market capitalisation and shareholders return, deductive approach is applied as this approach is considered to be effective to deduce the information. This approach is used as the study move from the general information regarding market capitalisation, shareholders return and financial leverage to the more specific information on the influence of financial leverage on shareholder's return and market capitalisation in Germany along with the impact of the covid pandemic on financial market (Armat et al., 2018). Using the deductive approach researcher studies what others have done on the concepts of financial leverages, market capitalisation and shareholders return, read the existing theories and information of the research, then analyse the main influence of financial leverage in Germany and the effect of covid that emerges from the existing data. The main benefit of using this approach is to study the relationship between the main concept of the study and generalize the finding to a certain extent. In contrast inductive is not applied because it is effective when there is no issue of time to conduct the study and existing data is scarce therefore, deductive is applied (Woiceshyn and Daellenbach, 2018).

Research strategies

The research study focuses on Germany and thus case study strategy is applied and the whole focus of the study is to analyse the impact of financial leverage on the market capitalisation of Germany and its shareholders' return along with the effect of covid on the financial leverage in the Germany market. By using the case study strategy researcher focused on collecting the data relevant to Germany to gain an in-depth understanding within the context of the study (Hancock et al., 2021). It is significant that, when conducting the case study research, the type of research is qualitative in nature and the present study also involved qualitative data collected from the existing sources. The understanding and assumption of the research play a role in the case study and it is typically informed by the interpretivism philosophy that is applied in the given study.

Choice of method

Majorly researchers involve a single method that is the mono method, mixed-method that is the combination of two methods and multi-method that is the use of wider methods of the research. Commonly qualitative and quantitative method is majorly applied in academic research. Quantitative research is the method that involves quantitative data and is used to generate the numeric result and hard facts by using logical, mathematical and statistical techniques (Rutberg and Bouikidis, 2018). Qualitative research involves non-numeric and qualitative data and this method is subjective in nature. The present study is based on the mono method as qualitative research is used to study the research topic. To collect the qualitative data literature review method is applied to collect the opinions and views of different scholars on the subject area. Qualitative research is selected because the researcher conducting the short term study and it is easy to conduct qualitative research in a limited time by collecting the existing data. Quantitative is not applied because the researcher did not collect numeric or statistical data (Rutberg and Bouikidis, 2018). Quantitative research is generally used when a researcher wants to confirm or test something and in the present study, the researcher tests nothing therefore quantitative is not applied.

Data collection method

To understand the concept of financial leverage, shareholders return and market capitalisation in Germany secondary data is collected and used to achieve the aim and objective of the research (D’Allerto and Raggi, 2021). Already existing data related to the market capitalisation and influence that financial leverage creates on it and previous researcher related to the influence of financial leverage on shareholder return is collected from the sources like Google scholar SINAHL and IIEexplorer. The data relating to the subject area from the previous articles, journals, reports and other relevant information is collected and used to achieve the aim and objective of the study. Secondary sources of data collected are used because they helped in collecting large sources of data related to the research topic in a cost-effective way as a result researcher select the relevant data and used it in the study. Secondary data collected is referenced appropriately to acknowledge the work of others. However, primary data is not collected in the study because of the time and cost restriction as primary data can be collected using surveys and interviews but that requires more time and money and therefore researcher did not collect primary data (D’Allerto and Raggi, 2021). Data collected from the already existing sources is used to perform a literature review and present the relevant information on the influence that financial leverage is creating on shareholders' return and market capitalisation in Germany.

Data analysis

The study involves the use of secondary data which is analysed by the researcher using thematic analysis. Thematic analysis is the effective method of analysing qualitative data as it is applied to a set of text that is collected by the researcher using the data collection method (Braun and Clarke, 2021). Using this method of research analysis, the researcher closely examines the researcher's data to identify the common themes. Here, in the present study researcher collected the data on the influence of financial leverage on the shareholders' return and market capital value in Germany as well as the impact that covid brought on the financial market, the data collected is examined in the common themes including market capitalisation, the impact of covid on Germany economy and the stock market, shareholders return and basic concept of financial leverage (Braun and Clarke, 2021). Thematic analysis is applied because the researcher wanted to identify the influence of financial leverage. This method offers flexibility to the investigator to interpret the data in the way that they find effective for the study and allows the researcher to approach the large data related to the research topic more easily by sorting them into broad themes, therefore this analysis method is applied in the proposed study. However, this method of data analysis involves the risk of missing nuances in the data because this method is quite subjective and relies on the judgement of the researcher and therefore it relies on the researcher to carefully reflect on the choice and interpretation (Braun and Clarke, 2021). While using this analysis method researcher needs to pay close attention to the data and information to ensure that no irrelevant information is used and interpreted.

Ethical consideration

Every research study involves ethical issues that the researcher needs to identify and resolve to make the study valid and reliable. Ethical consideration in research is a set of principles that guide the research design and practice. The present study acts on ethical principles including integrity, anonymity and confidentiality to keep it free from ethical issues. Research ethics matter for human rights, dignity and scientific integrity to ensure that research participants are informed and safe for research subjects (Sileyew, 2019). This research did not collect and used primary data and is, therefore, free from the ethical issues of taking informed consent of the participants, their rights to withdraw, risk of collecting sensitive information and other ethical issues related to human participants. However, the use of secondary data also involves ethical issues of confidentiality, disclosure, data storage and security, dissemination and use of findings. In respect to these issues, the researcher ensure that only relevant secondary data is collected from authentic sources and data is stored in the personal laptop of the researcher to keep the data confidential and private (Sileyew, 2019). Moreover, the author's credential is maintained by not sharing the data with any other researcher and ensuring the confidentiality of the data. Secondary data collected from the existing sources are referenced wherever used to acknowledge the work of others. It is ensured by the researcher that the study should be free of plagiarism or any misconduct and the researcher must accurately represent the results. Moreover, the research study is free from research misconduct as the researcher did not use any wrong information and did not misinterpret the result in the research report and maintained the reliability of the study (Arifin, 2018). Thus it can be said that the research study is performed ethically and the researcher presented relevant information honestly throughout the research.

Research limitation

It is for sure that the present study has some limitations and it is normal, however, it is critically important to identify and minimise the limitation of the research throughout the research process. Limitations in the research can exist due to data collection method, wrong interpretation, lack of previous studies and limited scope of the study that create an impact on the findings of the study (Akanle et al., 2020). One of the major limitations that the researcher faced in the present study is regarding data collection, as this study has a lack of primary data. The researcher did not collect primary data that reduced the quality of the research itself not involved in conducting a survey to collect data on its own. In addition, this research suffers from a time limit as the researcher has completed the study before the deadline which affects the ability of the researcher to collect first-hand data by conducting surveys and interviews. Moreover, the secondary data collected by the researcher from already existing data also created an issue because data collection from the existing sources involves the risk of outdated and irrelevant data. In the present study researcher applied interpretivism philosophy and thematic analysis where the researcher interpreted the data in his/her own ways and therefore this study has the limitation of biased views because the researcher collected and interpreted the data according to the research questions and aims (Akanle et al., 2020). At last, the researcher has no control over the quality of secondary data and relying on secondary data for the whole study might impact the research findings. Despite it is suggested that in the future researcher should consider all such limitations to select the appropriate method and conduct the study effectively.

Conclusion

From the overall section, it is concluded that the researcher used the method of data collection and interpretation had based on the research topic and areas that the researcher is studying. Effective methods are selected by the researcher to collect the needed content that helped in achieving the research aim and objectives.

(RESEARCH METHODOLOGY CHAPTER COMPLETED)

Reference List

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