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

Fabrizio Coricelli; Nigel Driffield; Sarmistha Pal; Isabelle Roland

doi:10.1016/j.jimonfin.2012.03.006

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

Fabrizio Coricelli, Nigel Driffield, Sarmistha Pal, Isabelle Roland

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	1674-1694
Number of pages	21
Journal	Journal of International Money and Finance
Volume	31
Issue number	6
DOIs	https://doi.org/10.1016/j.jimonfin.2012.03.006
Publication status	Published - 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

Keywords

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

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10.1016/j.jimonfin.2012.03.006

Leverage hurts firm performance
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
Accepted author manuscript, 371 KB

Cite this

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title = "When does leverage hurt productivity growth? A firm-level analysis: a firm-level analysis",

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.",

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AB - 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.

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

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Bibliographical note

Keywords

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