Firm Leverage and the Financial Crisis
The firm growth dynamics is an important topic since the growth performance of firms is the main source of the economic growth in countries. Generally, crises produce a sharp decline in firms’ growth and this leads to a decline in both the level of employment and the income of households. This paper focuses on the role of firm leverage on the growth performance of the firm during the global financial crisis. We investigate whether the firms that experienced a large leverage increase before the global financial crisis has worse growth performance of 2007 to 2009 than the firms that didn’t experience this rise. The findings suggest that the poorer sales growth performance of the firm was related to the firm leverage increase before the global financial crisis. The evidence shows that the correlation between leverage growth and the poorer sales growth performance is robust to firm-level control variables, such as size, age, fixed assets, liquid assets, inventories, profitability, export share and industry-specific factor.
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