The role of leverage in firm solvency: evidence from bank loans
Emilia Bonaccorsi di Patti (),
Alessio Dï¿½Ignazio (),
Marco Gallo () and
Giacinto Micucci ()
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Alessio Dï¿½Ignazio: 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
The two recessions that have hit Italy since the end of 2008 have raised the share of non-performing loans to businesses in banksï¿½ portfolios substantially. In this paper we evaluate to what extent the deterioration of credit quality was due not only to the decline in firmsï¿½ sales during the contraction of economic activity, but also to the level of firmsï¿½ 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 firmï¿½s 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 firmsï¿½ financial structure can be a powerful amplifier of macroeconomic shocks. A higher level of leverage reduces firmsï¿½ 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)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_244_14
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