The impact of leverage on firm performance : an empirical study of non-financial listed companies in Norway

Abstract

We study the impact of leverage on firm performance in the post-financial crisis period using a sample of non-financial listed companies in Norway. Based on various capital structure literature we expect a positive effect of increased leverage on performance at lower debt-ratios and negative effects on higher debt-ratios. We use Tobin’s Q as a measure of firm performance and a dynamic panel data model to control for the reverse effect from performance on leverage and unobserved firm heterogeneity. We show that the positive relationship between leverage and performance occurs only when leverage is sufficiently high. We find a negative coefficient for the linear term and a positive coefficient on the square term which contradicts our predictions. However, the relationship between leverage and firm performance is not robust to other measures of performance. Testing for differences in the relationship between leverage and performance for low-growth and high-growth firms separated based on P/E-ratio and Tobin’s Q yield inconclusive results. The results partly indicate that firms with high-growth potential are more affected by an increase in leverage than low-growth firms. Furthermore, the findings based on our sample do not support the predictions that the impact of leverage is different across industries.