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Excess Leverage and Productivity Growth in Emerging Economies: Is There A Threshold Effect?

  • Coricelli, Fabrizio

    ()

    (Paris School of Economics)

  • Driffield, Nigel

    ()

    (Aston University)

  • Pal, Sarmistha

    ()

    (University of Surrey)

  • Roland, Isabelle

    ()

    (London School of Economics)

The paper examines the relationship between leverage and growth in a group of emerging central and eastern European countries, who are at different levels of financial market development. We hypothesize a non-linear relationship in that moderate leverage could boost growth while very high leverage could lower it by increasing the likelihood of financial distress and bankruptcy. Estimates of a Threshold model confirm the non-linear relationship in our sample, after controlling for various firm, industry and financial market characteristics. We also endogenously determine a threshold level of leverage beyond which further increases in leverage could lower TFP growth.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4834.

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Length: 47 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4834
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