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

Coricelli, Fabrizio and Driffield, Nigel and Pal, Sarmistha and Roland, Isabelle (2012) When does leverage hurt productivity growth? A firm-level analysis. Journal of International Money and Finance. ISSN 0261-5606

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Identification Number: 10.1016/j.jimonfin.2012.03.006

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 productivitygrowth 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.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-intern...
Additional Information: © 2012 Elsevier B.V.
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Date Deposited: 08 May 2012 12:19
Last Modified: 08 May 2012 14:59
URI: http://eprints.lse.ac.uk/id/eprint/43514

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