Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis

Fabrizio Coricelli, Nigel Driffield, Sarmistha Pali and Isabelle Roland ()
Authors registered in the RePEc Author Service: Sarmistha Pal

CEDI Discussion Paper Series from Centre for Economic Development and Institutions(CEDI), Brunel University

Abstract: The paper aims to bridge the gap between the literature on optimal capital structure and the literature on finance-output-growth nexus. On the basis of the trade-off theory of capital structure, we posit a non-linear relationship between leverage and productivity growth at the firm level. We test this hypothesis using both standard and IV threshold regression models, which in contrast to conventional estimates, allows us to endogenously determine optimal leverage despite firms’ temporary deviations from the optimum. Estimates for a sample of Central and Eastern European countries confirm a non-linear hump-shaped relationship between leverage and productivity growth, thus endogenously identifying an optimal leverage ratio. We show how our paper relates to and contributes to the literature on optimal capital structure and finance-output-growth literature.

Pages: 33 pages
Date: 2011-04
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (2)

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