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

Coricelli, Fabrizio, Driffield, Nigel, 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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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.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 08 May 2012 12:19
URL: http://eprints.lse.ac.uk/43514/

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