The relationship between debt and a firm’s performance: the impact of institutional factors

Abstract

Purpose

The purpose of this paper is to contribute to the existing literature on the relationship between debt and firms’ performance, by focusing on the influence of the institutional framework on this relationship and on the role of macroeconomic variables in explaining performance.

Design/methodology/approach

The present work is based on a large sample of 48,840 manufacturing firms from nine European countries covering the 2008–2013 period and uses a fixed effects model.

Findings

Results show that the impact of debt on a firm’s performance depends on the measure of debt (short-term debt positively affects a firm’s performance, whereas long-term debt presents a negative relationship) and that the institutional framework is indeed affecting the relationship between debt and a firm’s performance: the positive effect of debt on a firm’s performance tends to be higher the greater the “efficiency of the legal system” and the greater the “credit market regulation.” Macroeconomic variables also play a key role in explaining performance.

Originality/value

Unlike most of the existing studies, which focus only on the relationship between debt and firms’ performance in a single country, the present work uses a sample of firms from nine countries with the purpose of filling a research gap and bringing new empirical evidence to this research area.

Citation

Forte, R. and Tavares, J.M. (2019), "The relationship between debt and a firm’s performance: the impact of institutional factors", Managerial Finance, Vol. 45 No. 9, pp. 1272-1291. https://doi.org/10.1108/MF-04-2018-0169