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Variance of Firm Performance and Leverage of Small Businesses

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  • Daisuke Tsuruta

Abstract

We investigate the relationship between leverage and firm performance using small business data from Japan by estimating the effects of leverage on both average firm performance and the variance of firm performance. We find that leverage has a negative effect on average firm performance and a positive effect on the variance of firm performance. This suggests that the problem of moral hazard is severe for highly leveraged firms. However, when highly leveraged firms have sufficient collateral assets, the effects of leverage are positive for average performance, but negative for the variance of performance. This implies that when small firms have sufficient collateral assets, highly leveraged businesses are better performers.

Suggested Citation

  • Daisuke Tsuruta, 2017. "Variance of Firm Performance and Leverage of Small Businesses," Journal of Small Business Management, Taylor & Francis Journals, vol. 55(3), pages 404-429, July.
    • Handle: RePEc:taf:ujbmxx:v:55:y:2017:i:3:p:404-429
    DOI: 10.1111/jsbm.12243
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    Cited by:

    1. Vivien Lefebvre, 2023. "Mobilizing potential slack and firm performance: Evidence from French SMEs before and during the COVID-19 period," Post-Print hal-04585954, HAL.
    2. Dominika Gajdosikova & Katarina Valaskova & Tomas Kliestik & Maria Kovacova, 2023. "Research on Corporate Indebtedness Determinants: A Case Study of Visegrad Group Countries," Mathematics, MDPI, vol. 11(2), pages 1-30, January.
    3. TSURUTA Daisuke, 2024. "Determinants and Consequences of Bank Borrowings of Small Businesses: Is the COVID-19 crisis special?," Discussion papers 24007, Research Institute of Economy, Trade and Industry (RIETI).

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