International evidence about leverage and corporate performance

What is it about?

This paper analyzes the effect of financial leverage on corporate operating performance and how this effect varies across countries. Results for 10,375 firms in 39 countries indicate that the performance of firms with greater leverage is significantly reduced compared to their competitors in industry downturns, in line with the importance of financial distress costs. However, this effect varies according to the legal origin of the countries, being positive in French civil law countries. The protection of shareholder rights and the strength of legal enforcement are the main variables explaining the effect of financial leverage on performance.

Featured Image

Photo by Carlos Muza on Unsplash

Photo by Carlos Muza on Unsplash

Why is it important?

Our aim is to analyze how leverage affects firm operating performance in industry downturns in different institutional environments bearing in mind that the importance of financial distress costs and the disciplinary role played by debt may vary between countries.