When Does Leverage Hurt Performance? - A Firm-Level Analysis

39 Pages Posted: 22 Aug 2012

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Nigel L. Driffield

Aston University - Aston Business School

Sarmistha Pal

University of Surrey; IZA Institute of Labor Economics

Isabelle Roland

London School of Economics & Political Science (LSE)

Date Written: August 21, 2012

Abstract

In the wake of the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level productivity growth in the spirit of the trade-off theory of capital structure. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. This estimate can provide guidance to firms and policy makers on identifying “excessive” leverage. We find a similar non-monotonic relationship between leverage and proxies for firm value. Our results are a first step in bridging the gap between the literature on optimal capital structure and the wider macro literature on the finance-growth nexus.

Keywords: trade-off theory, optimal leverage, TFP growth, non-linear relationship, threshold regression, transition economies

JEL Classification: G32, O16

Suggested Citation

Coricelli, Fabrizio and Driffield, Nigel L. and Pal, Sarmistha and Roland, Isabelle, When Does Leverage Hurt Performance? - A Firm-Level Analysis (August 21, 2012). Available at SSRN: https://ssrn.com/abstract=2133204 or http://dx.doi.org/10.2139/ssrn.2133204

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nigel L. Driffield

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

HOME PAGE: http://www.abs.aston.ac.uk/newweb/staff/Default.asp#E&S

Sarmistha Pal (Contact Author)

University of Surrey ( email )

Stag Hill
Guildford, England GU2 7XH
United Kingdom
01483 683995 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Isabelle Roland

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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