Leverage and Firm Performance: Threshold Evidence from the Role of Firm Size

Abstract

This article examines the threshold effect in the leverage-firm performance nexus. Using the dynamic panel threshold model of Seo and Shin (2016) that allows for the estimation of panel threshold effect in the presence of endogeneity on Nigerian data. Our empirical analysis adopts a large panel dataset of 104 Nigerian firms between 2005 and 2018. The empirical results comfirm threshold levels for the short-term, long-term and total leverage. Additionally, the results comfirm that the threshold relationship between firm leverage and performance is conditioned on firm size. Additionally, the present study also validates the role of endogeneity often neglected in the nexus. Overall, the study finds a more beneficial impact of leverage on large firms than small firms in the context of Nigeria. Policy recommendations are enclosed in the paper.