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When does leverage hurt productivity growth? A firm-level analysis

Author

Listed:
  • Fabrizio Coricelli

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Nigel Driffield
  • Sarmistha Pal
  • Isabelle Roland

    (LSE - London School of Economics and Political Science)

Abstract

In the wake of the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level productivity growth in the spirit of the trade-off theory of capital structure. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. This estimate can provide guidance to firms and policy makers on identifying "excessive" leverage. We find similar non-monotonic relationships between leverage and proxies for firm value. Our results are a first step in bridging the gap between the literature on optimal capital structure and the wider macro literature on the finance-growth nexus.

Suggested Citation

  • Fabrizio Coricelli & Nigel Driffield & Sarmistha Pal & Isabelle Roland, 2012. "When does leverage hurt productivity growth? A firm-level analysis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00818426, HAL.
    • Handle: RePEc:hal:cesptp:hal-00818426
    DOI: 10.1016/j.jimonfin.2012.03.006
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    More about this item

    Keywords

    Trade-off theory; Optimal leverage; TFP growth; Non-linear relationship; Threshold regression; Transition economies;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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