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Business Performance of Firms Using Debt

Author

Listed:
  • Koichi Ando

    (Professor, Faculty of Law, Chuo University)

  • Kazuyuki Matsumoto

    (Professor, Faculty of Economics, Teikyo University)

  • Yukari Matsumoto

    (Assistant Professor, Faculty of Economics, Teikyo University)

Abstract

How does debt influence the business performance of firms? This study analyzes the relationship between growth and stability of firms using debt and the degrees of long-term average use of debt based on corporate data over about 30 years from the 1980s. On the whole, a negative relationship was confirmed between the growth rates of sales and total assets as growth indicators and the debt ratio. For nonmanufacturing and mediumsized firms, however, the relationship is significantly negative between the growth rate of total assets and the debt ratio, but not significantly negative between the growth rate of sales and the debt ratio. This study interprets the higher probability of operating loss as the indicator of less stability and examines the relationship between the probability and the debt ratio. The positive relationship is confirmed for all industries and manufacturing industries, indicating that higher debt ratios are accompanied by a higher probability of operating loss, or lower stability. The relationship is clearer for large firms than for medium-sized ones. The results of the analysis using long-term average debt ratios suggests that debt-using firms f stability remains unhurt as far as growth is secured. An additional analysis using debt ratios in the beginning of the each analyzed period indicates that lower debt ratios in the beginning tends to lead to greater growth later and that higher debt ratios in the beginning tends to bring about greater stability later.

Suggested Citation

  • Koichi Ando & Kazuyuki Matsumoto & Yukari Matsumoto, 2017. "Business Performance of Firms Using Debt," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 13(2), pages 167-182, October.
    • Handle: RePEc:mof:journl:ppr13_02_05
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    File URL: https://www.mof.go.jp/english/pri/publication/pp_review/fy2017/ppr13_02_05.pdf
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    References listed on IDEAS

    as
    1. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    2. Fukuda, Atsuo & Hirota, Shinichi, 1996. "Main Bank Relationships and Capital Structure in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 10(3), pages 250-261, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Julija Bistrova & Natalja Lace & Ludmila Kasperovica, 2021. "Enterprise Crisis-Resilience and Competitiveness," Sustainability, MDPI, vol. 13(4), pages 1-24, February.

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    More about this item

    Keywords

    debt; business performance; growth; stability; probability of bankruptcy; leverage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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