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Firms’ leverage ratio and the Financial Instability Hypothesis: an empirical investigation for the US economy (1970–2014)

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  • Ítalo Pedrosa

Abstract

Reflecting the unsolved tensions regarding the transition from micro to macro results in Minsky’s Financial Instability Hypothesis (FIH), there are many ‘Minskian’ interpretations of how financial fragility builds up reflecting the unsolved tensions regarding the transition from micro to macro results in Minsky’s FIH. Using firm-level and macroeconomic data to comply with the variety of FIH’s interpretations, we empirically assess the relations between leverage and financial fragility in the US economy (1970–2014). To evaluate firms’ financial fragility, we deploy Minsky’s scale—from the financially sounder to the more fragile firms: hedge, speculative and Ponzi. The main findings are the following: (i) the evolution of the aggregate leverage ratio does not account for the systemic financial fragility, measured by the frequency of speculative and Ponzi firms, and (ii) within the biggest firms, the leverage has increased along with the incidence of hedge financing, and for the smallest firms group the opposite has happened. We conclude that a positive relation between leverage and financial fragility cannot be deemed to be a general outcome.

Suggested Citation

  • Ítalo Pedrosa, 2019. "Firms’ leverage ratio and the Financial Instability Hypothesis: an empirical investigation for the US economy (1970–2014)," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(6), pages 1499-1523.
    • Handle: RePEc:oup:cambje:v:43:y:2019:i:6:p:1499-1523.
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    File URL: http://hdl.handle.net/10.1093/cje/bez004
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    Citations

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    Cited by:

    1. Baines, Joseph & Hager, Sandy Brian, 2021. "The Great Debt Divergence and its Implications for the Covid-19 Crisis: Mapping Corporate Leverage as Power," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue Latest Ar.
    2. Brochier, Lidia & Freitas, Fábio, 2019. "Stock-flow ratios and the paradox of debt in canonical neo-kaleckian and supermultiplier models," MPRA Paper 96252, University Library of Munich, Germany.
    3. Ítalo Pedrosa & Dany Lang, 2021. "To what extent does aggregate leverage determine financial fragility? New insights from an agent-based stock-flow consistent model," Journal of Evolutionary Economics, Springer, vol. 31(4), pages 1221-1275, September.

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