Leverage and Corporate Performance: Does Institutional Environment Matter?
- 870 Downloads
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 wordscorporate governance financial structure frontier efficiency leverage
JEL ClassificationsG32 L26
Unable to display preview. Download preview PDF.
- Besley D., E. Kuh, R. Welsch, 1980, Regression Diagnostics: Identifying Influential Data and Sources of Collinearity, New York: Wiley.Google Scholar
- 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
- Corbett, J. and T. Jenkinson, 1994, ‚The Financing of Industry, 1970–89: An International Comparison’, CEPR Discussion Paper 948.Google Scholar
- Demirgüc-Kunt, A. and R. Levine, 2000, ‚Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons’, World Bank Working Paper 2143.Google Scholar
- 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
- Jensen M., 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Association Papers and Proceedings 76, 323–329.Google Scholar
- 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
- 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
- Kumbhakar, S. and C. A. K. Lovell, 2000, Stochastic Frontier Analysis, Cambridge University Press.Google Scholar
- 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
- Modigliani F., M. Miller, 1958, The Costs of Capital, Corporate Finance, and the Theory of Investment, American Economic Review 48, 433–443.Google Scholar
- Stiglitz J., A. Weiss, 1981, Credit Rationing in Markets with Imperfect Information, American Economic Review 71(3), 393–410.Google Scholar