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Does debt affect profitability? An empirical study of French trade sector

By Mazen Kebewar

Abstract

This article aims to expand existing empirical knowledge on the impact of debt level on profitability of companies. We analyze a sample of an unbalanced panel of 2325 unlisted French companies of trade sector spanning over a period of 1999 to 2006. By using the generalized method of moments (GMM), we show that the debt affects negatively the profitability, not only linearly, but also, in a non-linear (concave) way. However, while analyzing according to different size classes (VSEs, SMEs and LEs); we find that the linear negative effect becomes larger and the non-linear effect is significant only in small and medium-sized enterprises (SME)

Topics: Debt, GMM, Panel data, Profitability, JEL: C - Mathematical and Quantitative Methods/C.C3 - Multiple or Simultaneous Equation Models • Multiple Variables/C.C3.C33 - Panel Data Models • Spatio-temporal Models, JEL: G - Financial Economics/G.G3 - Corporate Finance and Governance/G.G3.G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill, JEL: L - Industrial Organization/L.L2 - Firm Objectives, Organization, and Behavior/L.L2.L25 - Firm Performance: Size, Diversification, and Scope, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, [QFIN.ST]Quantitative Finance [q-fin]/Statistical Finance [q-fin.ST]
Publisher: HAL CCSD
Year: 2013
OAI identifier: oai:HAL:halshs-00780310v1
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