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The role of leverage in firm solvency: evidence from bank loans

Emilia Bonaccorsi di Patti (), Alessio D�Ignazio (), Marco Gallo () and Giacinto Micucci ()
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Alessio D�Ignazio: Bank of Italy
Marco Gallo: Bank of Italy
Giacinto Micucci: Bank of Italy

Authors registered in the RePEc Author Service: Alessio D'Ignazio

No 244, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The two recessions that have hit Italy since the end of 2008 have raised the share of non-performing loans to businesses in banks� portfolios substantially. In this paper we evaluate to what extent the deterioration of credit quality was due not only to the decline in firms� sales during the contraction of economic activity, but also to the level of firms� financial debt at the onset of the first recession. Our results show that, other things being equal, a ten percentage point increase in leverage is associated with a higher probability of default of almost one percentage point. Moreover, the adverse impact of a fall in sales on a firm�s solvency is almost four times greater for firms in the highest quartile of the leverage distribution than for firms in the first quartile. These findings confirm that firms� financial structure can be a powerful amplifier of macroeconomic shocks. A higher level of leverage reduces firms� resilience during a recession, and this in turn weakens the balance-sheets of banks and thus their ability to provide credit.

Keywords: economic and financial crisis; firms leverage; banks non-performing loans; insolvency; data on international trade and FDI; foreign direct investment (search for similar items in EconPapers)
JEL-codes: G01 G21 G31 G33 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban
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Journal Article: The Role of Leverage in Firm Solvency: Evidence From Bank Loans (2015) Downloads
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