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

Fabrizio Coricelli, Nigel Driffield, Sarmistha Pal and Isabelle Roland ()
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Isabelle Roland: LSE - London School of Economics and Political Science

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

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)
Date: 2012-10-01
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Published in Journal of International Money and Finance, 2012, 31 (6), pp.1674-1694. ⟨10.1016/j.jimonfin.2012.03.006⟩

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Journal Article: When does leverage hurt productivity growth? A firm-level analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-00818426

DOI: 10.1016/j.jimonfin.2012.03.006

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