Excess Leverage And Productivity Growth In Emerging Economies: Is There A Threshold Effect?

The paper examines the relationship between leverage and growth in a group of emerging central and eastern European countries, who are at different levels of financial market development. The authors hypothesize a non-linear relationship in that moderate leverage could boost growth while very high leverage could lower it by increasing the likelihood of financial distress and bankruptcy. Estimates of a Threshold model confirm the non-linear relationship in their sample, after controlling for various firm, industry and financial market characteristics. They also endogenously determine a threshold level of leverage beyond which further increases in leverage could lower TFP growth.