The Effect of Financial Leverage on Performance of Sharia Compliant Companies Listed in Jakarta Stock Exchange

Among the requirement set by Otoritas Jasa Keuangan (OJK) for a company to be Sharia compliant is 40% limit on the financial leverage ratio. Taking the Islamic perspective on the limitation of using interest-bearing instrument both as a means of financing and investing, this paper attempts to investigate whether there is a significant relationship between financial leverage and performance of the company. 90 Sharia-compliant companies were selected as a sample in this study and data from 2011-2015 were taken to be observed. Several tests were applied to analyze the data; descriptive analysis, correlation analysis, and multiple regression analysis. Findings revealed that leverage factors (Debt/Asset, Debt/Capital, and ICR) have a significant negative impact to the company performance. However, the magnitude of effect and relations are small and limited. The finding in this study proves that the limitation of the interest-bearing instrument as a means for financing set for the sharia-compliant companies has a good impact on the performance though on a small scale. This negative effect of leverage factors can be explained by the disadvantage of potential financial distress that surpasses the benefit of tax shield from issuing debts