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Are Highly Leveraged Firms More Sensitive to an Economic Downturn?

Author

Summary, in English

The paper tests the hypothesis that highly leveraged firms lose market shares to their less leveraged rivals in an industry downturn. Both parametric and semiparametric regression methods are applied to analyse the relationships between firm performance and leverage. It is found that the highly leveraged firms in distressed industries face relatively lower sales growth and stock returns but are still able to retain a relatively higher growth in profitability. The findings may suggest that the decline in sales of the highly leveraged firms might be a result of managers' preferences to decrease the activity of product lines with low profitability.

Publishing year

2003

Language

English

Pages

219-241

Publication/Series

European Journal of Finance

Volume

9

Issue

3

Document type

Journal article

Publisher

Taylor & Francis

Topic

  • Economics

Keywords

  • semiparametric regression
  • robust regression
  • nonlinear model
  • firm performance
  • financial distress

Status

Published

ISBN/ISSN/Other

  • ISSN: 1466-4364