Leverage and corporate performance: International evidence

• Autores: Victor M. González
• Localización: Notas técnicas: [continuación de Documentos de Trabajo FUNCAS], ISSN-e 1988-8767, Nº. 661, 2012
• Idioma: inglés
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• Resumen

  • This paper analyzes the effect of financial leverage on firm operating performance in industry downturns and how this effect varies across countries depending on their legal origin. Results for 10,375 firms in 39 countries over the period 1995-2004 indicate that the operating performance of firms with greater leverage is significantly reduced compared to their competitors as a consequence of industry downturns. This effect, which is consistent with the importance of the indirect costs of financial distress, varies according to the legal origin of the countries. Leverage in French civil law countries has a positive effect on operating performance when the industry has suffered a downturn.

    Our results highlight that the protection of shareholder rights and the strength of legal enforcement are the variables explaining the effect of financial leverage on firm operating performance. These findings suggest the relevance of institutional characteristics to explain the effects of leverage on corporate performance.