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Leverage and firm performance: New evidence on the role of firm size

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  • Ibhagui, Oyakhilome W.
  • Olokoyo, Felicia O.

Abstract

In this paper, we draw on the Hansen (1999) threshold regression model to examine the empirical links between leverage and firm performance by means of a new threshold variable, firm size. We ask whether there exists an optimal firm size for which leverage is not negatively related to firm performance. Accordingly, with a panel data of 101 listed firms in Nigeria between 2003 and 2007, we explore whether the ultimate effect of leverage on firm performance is contingent on firm size; that is, whether the type of impact that leverage has on the performance of a firm is dependent on the size of the firm. Our results show that the negative effect of leverage on firm performance is most eminent and significant for small-sized firms and that the evidence of a negative effect diminishes as a firm grows, eventually vanishing when firm size exceeds its estimated threshold level. We find that this result continues to hold, irrespective of the debt ratios utilized. In line with earlier studies, our results show that the effect of leverage on Tobin’s Q is positive for Nigeria’s listed firms. However, our new finding is the evidence that the strength of the positive relationship depends on the size of the firm and is mostly higher for small-sized firms.

Suggested Citation

  • Ibhagui, Oyakhilome W. & Olokoyo, Felicia O., 2018. "Leverage and firm performance: New evidence on the role of firm size," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 57-82.
    • Handle: RePEc:eee:ecofin:v:45:y:2018:i:c:p:57-82
    DOI: 10.1016/j.najef.2018.02.002
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    More about this item

    Keywords

    Leverage; Debt ratios; Firm performance; Threshold variable;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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