Leverage and firm performance of small businesses: evidence from Japan

Leverage and firm performance of small businesses: evidence from Japan Highly leveraged small businesses cannot obtain enough credit because of the debt overhang problem. Therefore, highly leveraged firms may lose potential profits from profitable investment opportunities in which they are unable to invest. On the other hand, highly leveraged small businesses can enhance their performance because banks and trade creditors monitor their activity and prevent inefficient management. Using small-business data for Japan, we empirically investigate the relationship between firm performance and leverage. We find, first, that highly leveraged small businesses increase their trade payables less even if they have investment opportunities. Second, highly leveraged small businesses convert more bills receivables into cash by selling them to finance companies to finance their growth opportunities. Third, highly leveraged firms enjoy stronger performance (measured as firm sales growth or profitability) compared with low-leveraged firms. These results highlight the benefits of high leverage for small businesses. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Leverage and firm performance of small businesses: evidence from Japan

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Management/Business for Professionals; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
D.O.I.
10.1007/s11187-014-9601-5
Publisher site
See Article on Publisher Site

Abstract

Highly leveraged small businesses cannot obtain enough credit because of the debt overhang problem. Therefore, highly leveraged firms may lose potential profits from profitable investment opportunities in which they are unable to invest. On the other hand, highly leveraged small businesses can enhance their performance because banks and trade creditors monitor their activity and prevent inefficient management. Using small-business data for Japan, we empirically investigate the relationship between firm performance and leverage. We find, first, that highly leveraged small businesses increase their trade payables less even if they have investment opportunities. Second, highly leveraged small businesses convert more bills receivables into cash by selling them to finance companies to finance their growth opportunities. Third, highly leveraged firms enjoy stronger performance (measured as firm sales growth or profitability) compared with low-leveraged firms. These results highlight the benefits of high leverage for small businesses.

Journal

Small Business EconomicsSpringer Journals

Published: Aug 17, 2014

References

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