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

Abstract

‘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 Financial Instability Hypothesis (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.

The Great Debt Divergence and its Implications for the Covid-19 Crisis: Mapping Corporate Leverage as Power

“…2 The work of Hyman Minsky (1982Minsky ( , [1986 2008) represents another advance in thinking about corporate indebtedness. In his 'financial instability hypothesis' (FIH), Minsky emphasised the importance of the financing decisions of the non-financial corporate sector to explain fluctuations in the business cycle (Pedrosa 2019(Pedrosa , p. 1501. Countering neoclassical dogma, Minsky (1982, p. 19) famously asserted that ' … instability results from the normal functioning of a capitalist economy', and followed Keynes in emphasising the role of investor expectations in driving this de-stabilizing tendency (Pollin 1986, p. 217).…”

“…They find that the share of firms classified as Ponzi has been increasing since the 1970s and that the incidence of Ponzi financing regimes is concentrated among smaller firms (see also Davis 2016Davis , 2018. Another exception to the paucity of empirical research on the FIH is a study by Ítalo Pedrosa (2019), which also focuses on the US non-financial sector. Like Davis et al, Pedrosa finds that the incidence of Ponzi finance is concentrated among small firms.…”

Risco Sistêmico, Fragilidade Financeira E Crise: Uma Análise Pós-Keynesiana a Partir Da Contribuição De Fernando Cardim De Carvalho

“…When speculative and Ponzi borrowers are dominant in the universe of asset-holders, the economy is exposed to systemic risk, because even a small disappointment (...) or a disappointment in profit expectations can lead to a massive de-leveraging process. (CARVALHO, 2015, p. 107-108) Análises do mundo real, como Pedrosa (2019), acabam por demandar alguma qualificação desse argumento, uma vez que os dados empíricos não oferecem amplo suporte a uma relação positiva, direta e linear entre alavancagem e fragilidade financeira. 24 A alavancagem pode ser considerada uma condição necessária, mas não suficiente para caracterizar uma maior fragilidade financeira.…”

“…O autor analisa os dados para empresas americanas entre os anos 1970 e 2014 e chega aos seguintes resultados: "(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"(PEDROSA, 2019(PEDROSA, , p. 1499. A partir disso, conclui que uma relação positiva entre alavancagem e fragilidade financeira não pode ser considerada um resultado geral.…”

Minsky E a Fragilidade Financeira Das Distribuidoras Do Setor Elétrico Brasileiro

“…O nível de robustez ou de fragilidade financeira de uma economia dependeria da composição das unidades econômicas entre essas três categorias. Apesar da preocupação predominantemente macroeconômica da literatura minskyana, alguns poucos autores dessa tradição caminharam no sentido de realizar avaliações da fragilidade financeira a partir de um foco setorial (MULLIGAN, 2013;TYMOIGNE, 2014;NISHI, 2016;ROLIM et al, 2016;DAVIS et al, 2017;PEDROSA, 2017). Entretanto esses trabalhos, em geral, deram importância a segmentos que têm relevância sistêmica, a exemplo do sistema financeiro, ou avaliaram vários setores produtivos simultaneamente, como um passo preliminar para quantificar o risco financeiro da economia como um todo.…”