When does leverage hurt productivity growth? A firm-level analysis

Fabrizio Coricelli, Nigel Driffield, Sarmistha Pal and Isabelle Roland

Journal of International Money and Finance, 2012, vol. 31, issue 6, 1674-1694

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 similar non-monotonic relationships 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 (search for similar items in EconPapers)
JEL-codes: G32 O16 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (58)

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Working Paper: When does leverage hurt productivity growth? A firm-level analysis (2012)
Working Paper: When does leverage hurt productivity growth? A firm-level analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:6:p:1674-1694

DOI: 10.1016/j.jimonfin.2012.03.006

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