Does Debt Affect Profitability? An Empirical Study of French Trade Sector
10 Pages Posted: 23 Jan 2013
Date Written: January 23, 2013
This article aims to expand existing empirical knowledge on the impact of debt level on profitability of companies. We analyze a sample of an unbalanced panel of 2325 unlisted French companies of trade sector spanning over a period of 1999 to 2006. By using the generalized method of moments (GMM), we show that the debt affects negatively the profitability, not only linearly, but also, in a non-linear (concave) way. However, while analyzing according to different size classes (VSEs, SMEs and LEs); we find that the linear negative effect becomes larger and the non-linear effect is significant only in small and medium-sized enterprises (SME).
Keywords: debt, GMM, panel data, profitability
JEL Classification: C33, G32, L25
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