Leverage and Corporate Performance: A Frontier Efficiency Analysis on European Countries

Abstract

This paper aims to provide new empirical evidence on a major corporate governance issue: the relationship between leverage and corporate performance. We propose two major findings to this literature by applying frontier efficiency techniques to measure performance of firms from seven European countries. We then proceed to regressions of corporate performance on a set of variables including leverage. We find that the relationship between leverage and corporate performance varies across countries, which tends to support the influence of institutional factors on this link. We then suggest the influence of the access to bank credit and the efficiency of the legal system on the relationship between leverage and corporate performance.

Keywords: corporate governance, financial structure, frontier efficiency, leverage

JEL Classification: G32