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When Does Leverage Productivity Growth? A Firm-level Analysis

Pal, S, Coricelli, F, Driffield, N and Roland, I (2012) When Does Leverage Productivity Growth? A Firm-level Analysis Journal of International Money and Finance, 31 (6). 1674 - 1694. 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 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.

Item Type: Article
Additional Information: Copyright © 2012 Elsevier Ltd. All rights reserved.NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Money and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Money and Finance, 31(6), October 2012, DOI 10.1016/j.jimonfin.2012.03.006.
Divisions: Faculty of Business, Economics and Law > Surrey Business School
Depositing User: Symplectic Elements
Date Deposited: 21 Aug 2012 08:52
Last Modified: 09 Jun 2014 13:17
URI: http://epubs.surrey.ac.uk/id/eprint/590049

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