Firms' leverage and labour productivity: a quantile regression approach

In the aftermath of financial crisis, many studies using macro level data has argued that financial pressure and higher debt will negatively affect the firm growth. This paper is an attempt to investigate the micro level explanation of the relationship between leverage and labour productivity. The study examines the relationship between firm leverage and labour productivity using a rich dataset on Indian manufacturing firms over the period 1995-2010. Financial status of firms are considered as one of the major factor effecting firm performance in terms of productivity, size and real decisions such as R&D, physical capital investments, exports ,FDI etc. We employ a quantile regression approach to examine the effect of leverage on firm's labour productivity. We find that leverage do not increase productivity at the low levels of productivity. But for medium and higher productivity firms, leverage tend to increase the productivity. The empirical results points to non-monotonic relationship between leverage and labour productivity. Thus we conclude that increase in leverage adversely affect the productivity of less productive firms.