Firm Performance and (Foreign) Debt Financing before and during the Crisis: Evidence from Firm-Level Data

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This paper finds that foreign debt financing improved firm performance and mitigated the adverse effects of leverage for moderately leveraged firms in Slovenia before and during the recent crisis.

Authors: Mateja Gabrijelčič | Bank of Slovenia
Uroš Herman | GSEFM, Goethe University, Frankfurt
Andreja Lenarčič | ESM

Abstract:

This paper studies the effects of financial leverage and foreign financing on firm performance before and during the recent crisis, using a large panel of Slovenian companies. We find a significant negative impact of leverage on firm performance, even when we explicitly control for the reverse causality between the two variables. The negative effect, albeit weaker, persists also in the crisis period. Firms with some foreign debt performed better on average than firms relying only on domestic financing. At the same time, they suffered a stronger decrease in performance if their total leverage increased. Moreover, when we explicitly control for the amount of foreign financing, we find that it has a positive and highly significant effect on firm performance. The significant positive effect of foreign financing in the pre-crisis period seems to be entirely driven by privately owned firms, while the effects are negative for the state owned companies. During the crisis, the effects are positive but insignificant for both ownership types.Finally, when comparing domestic and foreign owned firms, we see no substantial variation in the coefficients.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

JEL codes: F34, G15, G24, H63

Source: European Stability Mechanism | Working Paper Series | Volume 2016 | No 14 | May 2016 | 34 Pages
 

Copyright © European Stability Mechanism, 2016 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.