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Are highly leveraged firms more sensitive to an economic downturn?

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  • Hossein Asgharian

Abstract

The paper tests the hypothesis that highly leveraged firms lose market shares to their less leveraged rivals in an industry downturn. Both parametric and semiparametric regression methods are applied to analyse the relationships between firm performance and leverage. It is found that the highly leveraged firms in distressed industries face relatively lower sales growth and stock returns but are still able to retain a relatively higher growth in profitability. The findings may suggest that the decline in sales of the highly leveraged firms might be a result of managers' preferences to decrease the activity of product lines with low profitability.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210132381
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 9 (2003)
Issue (Month): 3 ()
Pages: 219-241

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Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:219-241

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Related research

Keywords: financial distress; firm performance; nonlinear model; semiparametric regression; robust regression;

References

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  1. Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
  2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  3. Paul Asquith & Robert Gertner & David Scharfstein, 1991. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," NBER Working Papers 3942, National Bureau of Economic Research, Inc.
  4. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  5. Haugen, Robert A & Senbet, Lemma W, 1978. "The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 33(2), pages 383-93, May.
  6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  8. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
  9. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
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Cited by:
  1. Konstantinos S. Skandalis & Panagiotis G. Liargovas & Anna A. Merika, 2008. "Firm Management Competence: Does It Matter?," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 167-180, August.
  2. Carmen Corduneanu & Laura Raisa Milos, 2009. "Empirical Evidence On The Influence Of Stakeholder Theory Upon The Capital Structure Of Romanian Companies," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 39.

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