Leverage and Corporate Performance: Does Institutional Environment Matter? |
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Authors: | Laurent Weill |
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Institution: | (1) Institut d’Etudes Politiques, Universite Robert Schuman, 47 avenue de la Foret Noire, Strasbourg, 67000, France |
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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 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.
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Keywords: | corporate governance financial structure frontier efficiency leverage |
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