Journal
JOURNAL OF INTERNATIONAL MONEY AND FINANCE
Volume 31, Issue 6, Pages 1674-1694Publisher
ELSEVIER SCI LTD
DOI: 10.1016/j.jimonfin.2012.03.006
Keywords
Trade-off theory; Optimal leverage; TFP growth; Non-linear relationship; Threshold regression; Transition economies
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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. (C) 2012 Elsevier Ltd. All rights reserved.
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