Excess Leverage and Productivity Growth in Emerging Economies: Is There a Threshold Effect?

Abstract

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.

Keywords: excess leverage, bank efficiency, market capitalization, TFP growth, Threshold model, non-linear relationship, transition experience

JEL Classification: G32, O16