Corporate performance in recessions : the effects of capital structure and growth

Abstract

The purpose of this study is to analyze how recessions affect the impact of prior growth and capital structure on corporate performance. Using multiple regression analysis on financial statement data from the period 2000-2012 we were able to investigate this on a large sample of Norwegian firms. Splitting our performance construct into profitability and growth, our results show that i) recessions negate the positive effects of prior growth on growth that rapidly growing firms experience in non-recessionary years; ii) recessions induce a negative non-linear effect of prior growth on profitability, which particularly affects fast-growing firms; iii) recessions exacerbate the negative effect of high leverage found in non-recessionary years; iv) recessions induce an increasingly negative effect of leverage on profitability, and v) there is little evidence of an interaction effect between capital structure and growth on corporate performance in our sample. In sum, our findings indicate that both prior growth and high leverage can have substantial negative impact on firm performance in recessions. The thesis includes a brief investigation of potential causal mechanisms behind the negative effects we observe. We find support for a removal of creditors and investors’ intertemporal productivity indifference during recessions, and that industry affiliation and credit constraints provide important channels for recessionary impact. Lastly we provide directions for future research that can expand on our exploratory study.