IZA DP No. 4834: Excess Leverage and Productivity Growth in Emerging Economies: Is There A Threshold Effect?
revised version published as 'When does leverage hurt productivity growth? A firm-level analysis' in: Journal of International Money and Finance, 2012, 31 (6), 1674-1694
The paper examines the relationship between leverage and growth in a group of emerging central and eastern European countries, who are at different levels of financial market development. We hypothesize a non-linear relationship in that moderate leverage could boost growth while very high leverage could lower it by increasing the likelihood of financial distress and bankruptcy. Estimates of a Threshold model confirm the non-linear relationship in our sample, after controlling for various firm, industry and financial market characteristics. We also endogenously determine a threshold level of leverage beyond which further increases in leverage could lower TFP growth.