Financial Leverage and Stock-Price Volatility in an Emerging Market: Evidence from Indonesian Consumer Non-Cyclicals

Abstract

Consumer non-cyclicals are often considered defensive investments; however, differences in capital structure may expose their stocks to substantial price volatility. This study examined the relationships between profitability, financial leverage, firm size, and stock-price volatility among Indonesian consumer non-cyclical firms from 2022 to 2024. A quantitative observational research design was employed using a balanced panel of 30 firms, comprising 90 firm-year observations. Stock-price volatility was measured using the natural logarithm of Parkinson's range-based variance estimator, calculated from annual high and low stock prices. A random-effects panel regression model incorporated year fixed effects and firm-clustered standard errors, supplemented by robustness checks involving a logarithmic transformation of leverage, a price-source subsample analysis, and the exclusion of highly leveraged observations. Financial leverage was positively and significantly associated with stock-price volatility (coefficient = 0.2427; p = 0.002), whereas profitability exhibited no statistically significant association (p = 0.499). Firm size demonstrated a negative association that was marginally significant at the 10% significance level (p = 0.062). The positive association between financial leverage and stock-price volatility remained robust following the logarithmic transformation and within the subsample using issuer-linked price sources. However, this association became statistically insignificant after excluding observations with debt-to-equity ratios exceeding 3 (p = 0.771). These findings suggest that the estimated average association was substantially influenced by highly leveraged observations, consistent with the proposition that debt financing may amplify equity risk. The study concludes that financial leverage may serve as a useful indicator for investment screening within traditionally defensive sectors, particularly among highly indebted firms. Nevertheless, the observational nature of the evidence does not establish a causal relationship or identify a statistically validated leverage threshold.