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Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis

Listed author(s):
  • Fabrizio Coricelli

    ()

  • Nigel Driffield

    ()

  • Sarmistha Pali

    ()

  • Isabelle Roland

    ()

The paper aims to bridge the gap between the literature on optimal capital structure and the literature on finance-output-growth nexus. On the basis of the trade-off theory of capital structure, we posit a non-linear relationship between leverage and productivity growth at the firm level. We test this hypothesis using both standard and IV threshold regression models, which in contrast to conventional estimates, allows us to endogenously determine optimal leverage despite firms’ temporary deviations from the optimum. Estimates for a sample of Central and Eastern European countries confirm a non-linear hump-shaped relationship between leverage and productivity growth, thus endogenously identifying an optimal leverage ratio. We show how our paper relates to and contributes to the literature on optimal capital structure and finance-output-growth literature.

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File URL: http://www.brunel.ac.uk/__data/assets/pdf_file/0008/342764/CEDI_11-05.pdf
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Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 11-05.

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Length: 33 pages
Date of creation: Apr 2011
Handle: RePEc:edb:cedidp:11-05
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  1. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 47-100, January.
  2. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, 03.
  3. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, 08.
  4. Sourafel Girma, 2005. "Absorptive Capacity and Productivity Spillovers from FDI: A Threshold Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 281-306, 06.
  5. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
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