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Are highly leveraged firms more sensitive to an economic downturn?

  • Hossein Asgharian

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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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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  9. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August.
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