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.