Small Business Economics

, Volume 30, Issue 3, pp 251–265 | Cite as

Leverage and Corporate Performance: Does Institutional Environment Matter?

  • Laurent WeillEmail author


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 medium-sized firms from seven European countries. A maximum likelihood procedure is used to estimate a stochastic cost frontier and the parameters of an equation relating cost inefficiency to leverage simultaneously. 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 efficiency of the legal system and in a lesser degree of the access to bank credit on the relationship between leverage and corporate performance.

Key words

corporate governance financial structure frontier efficiency leverage 

JEL Classifications

G32 L26 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aigner D., C. A .K. Lovell, P. Schmidt, 1977, Formulation and Estimation of Stochastic Frontier Production Function Models, Journal of Econometrics 6, 21–37.CrossRefGoogle Scholar
  2. Battese G., T. Coelli, 1995, A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data, Empirical Economics, 20, (2), 325–332.CrossRefGoogle Scholar
  3. Berger A., D. Humphrey, 1997, Efficiency of Financial Institutions: International Survey and Directions for Future Research, European Journal of Operational Research 98, 175–212.CrossRefGoogle Scholar
  4. Besley D., E. Kuh, R. Welsch, 1980, Regression Diagnostics: Identifying Influential Data and Sources of Collinearity, New York: Wiley.Google Scholar
  5. Charnes A., W. Cooper, E. Rhodes, 1978, Measuring Efficiency of Decision Making Units, European Journal of Operations Research 6, 429–444.CrossRefGoogle Scholar
  6. Chittenden F., Hall G., Hutchinson P., 1996, Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation, Small Business Economics, 8(1), 59–67.CrossRefGoogle Scholar
  7. Coelli, T., 1996, ‚A Guide To FRONTIER Version 4.1: A Computer Program for Stochastic Production and Cost Function Estimation’, Centre for Efficiency and Productivity Analysis, University of New England, Working Paper 96/07.Google Scholar
  8. Corbett, J. and T. Jenkinson, 1994, ‚The Financing of Industry, 1970–89: An International Comparison’, CEPR Discussion Paper 948.Google Scholar
  9. Demirgüc-Kunt, A. and R. Levine, 2000, ‚Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons’, World Bank Working Paper 2143.Google Scholar
  10. Grossman S., Hart O., 1982, Corporate Financial Structure and Managerial Incentives, in: J. McCall, (ed.) The Economics of Information and Uncertainty Chicago: University of Chicago Press.Google Scholar
  11. Jensen M., 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Association Papers and Proceedings 76, 323–329.Google Scholar
  12. Jensen M., Meckling W., 1976, Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure, Journal of Financial Economics 76, 323–339.Google Scholar
  13. Johnson S., 1997, An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure, Journal of Financial and Quantitative Analysis 32(1), 47–69.CrossRefGoogle Scholar
  14. Jondrow J., C. A. K. Lovell, I. Materov, P. Schmidt, 1982, On the Estimation of Technical Inefficiency in the Stochastic Frontier Production Function Model, Journal of Econometrics 19, 233–238.CrossRefGoogle Scholar
  15. Kinsman, M. and J. Newman, 1999, ‚Debt Level and Corporate performance: An Empirical Analysis’, Proceedings of the 28th Annual Meeting of the Western Decision Sciences Institute, April 6–10, 1999, Mexico: Puerto Vallarta.Google Scholar
  16. Kumbhakar, S. and C. A. K. Lovell, 2000, Stochastic Frontier Analysis, Cambridge University Press.Google Scholar
  17. La Porta R., F. Lopez-De-Silanes, A. Shleifer, R. Vishny, 1997, Legal Determinants of External Finance, Journal of Finance LII, (3), 1131–1150.CrossRefGoogle Scholar
  18. La Porta R., F. Lopez-De-Silanes, A. Shleifer, R. Vishny, 1998, Law and Finance, Journal of Political Economy 106, 1113–1155.CrossRefGoogle Scholar
  19. Leland H., Pyle D., 1977, Information Asymmetries, Financial Structure and Financial Intermediation, Journal of Finance 32, 371–387.CrossRefGoogle Scholar
  20. Lovell C. A. K., 1993, Production Frontiers and Productive Efficiency, in: H. Fried, C. A .K. Lovell, P. Schmidt, (eds.) The Measurement of Productive Efficiency: Techniques and Applications, London: Oxford University Press, 3–67.Google Scholar
  21. Majumdar S., P. Chhibber, 1999, Capital Structure and Performance: Evidence from a Transition Economy on an Aspect of Corporate Governance, Public Choice 98, 287–305.CrossRefGoogle Scholar
  22. Michaelas N., F. Chittenden, P. Poutziouris, 1999, Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data, Small Business Economics 12, 113–130.CrossRefGoogle Scholar
  23. Modigliani F., M. Miller, 1958, The Costs of Capital, Corporate Finance, and the Theory of Investment, American Economic Review 48, 433–443.Google Scholar
  24. Myers S., 1977, Determinants of Corporate Borrowing, Journal of Financial Economics 5, 147–175.CrossRefGoogle Scholar
  25. Nickell S., D. Nicolitsas, N. Dryden, 1997, What Makes Firms Perform Well ?, European Economic Review 41, 783–796.CrossRefGoogle Scholar
  26. Nickell S., D. Nicolitsas, 1999, How Does Financial Pressure Affect Firms?, European Economic Review 43, 1435–1456.CrossRefGoogle Scholar
  27. Pushner G., 1995, Equity Ownership Structure, Leverage and Productivity: Empirical Evidence from Japan, Pacific-Basin Finance Journal 3, 241–255.CrossRefGoogle Scholar
  28. Rajan R., L. Zingales, 1995, What Do We Know about Capital Structure? Some Evidence from International Data, Journal of Finance 50, 1421–1460.CrossRefGoogle Scholar
  29. Ross S., 1977, The Determination of Financial Structure: The Incentive Signalling Approach, Bell Journal of Economics 8, 23–40.CrossRefGoogle Scholar
  30. Stiglitz J., A. Weiss, 1981, Credit Rationing in Markets with Imperfect Information, American Economic Review 71(3), 393–410.Google Scholar
  31. Van der Wijst N., R. Thurik, 1993, Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data, Small Business Economics 5, 55–65.CrossRefGoogle Scholar
  32. Wang H., P. Schmidt, 2002, One-Step and Two-Step Estimation of the Effects of Exogenous Variables on Technical Efficiency Levels, Journal of Productivity Analysis, 18, 129–144.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Institut d’Etudes PolitiquesUniversite Robert SchumanStrasbourgFrance

Personalised recommendations