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Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis

Author

Listed:
  • Fabrizio Coricelli

  • Nigel Driffield

  • Sarmistha Pali

  • Isabelle Roland

Abstract

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.

Suggested Citation

  • Fabrizio Coricelli & Nigel Driffield & Sarmistha Pali & Isabelle Roland, 2011. "Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis," CEDI Discussion Paper Series 11-05, Centre for Economic Development and Institutions(CEDI), Brunel University.
    • Handle: RePEc:edb:cedidp:11-05
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    References listed on IDEAS

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    Cited by:

    1. Mateja Gabrijelčič & Uroš Herman & Andreja Lenarčič, 2016. "Firm Performance and (Foreign) Debt Financing before and during the Crisis: Evidence from Firm-Level Data," Working Papers 15, European Stability Mechanism.
    2. Gabriela Brendea & Fanuta Pop & Loredana Mihalca, 2022. "Capital Structure and Firm Performance: The Case of Central and Eastern European Economies," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(5), pages 430-449, May.

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