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

Fabrizio Coricelli, Nigel Driffield, Sarmistha Pal, Isabelle Roland

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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.
Original languageEnglish
Pages (from-to)1674-1694
Number of pages21
JournalJournal of International Money and Finance
Issue number6
Publication statusPublished - Oct 2012

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of international money and finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Coricelli, F, Driffield, N, Pal, S & Roland, I, 'When does leverage hurt productivity growth? A firm-level analysis' Journal of international money and finance, vol 31, no. 6 (2012) DOI 10.1016/j.jimonfin.2012.03.006


  • trade-off theory
  • optimal leverage
  • TFP growth
  • non-linear relationships
  • threshold regression
  • transition economies


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