The problem of choice of leverage: example of Polish firms

Abstract

The purpose of this paper is to demonstrate the tendency to low leverage in Polish companies. We will indicate that it was a conscious choice by companies and that it was at the source of the robustness of the Polish economy during the crisis. This demonstration is based on the establishment of “stylized facts” from microeconomic data on companies, coming from their financial statements and from surveys carried out by the National Bank of Poland. The data covers the level of leverage, its frequency and duration, the declarations of firms themselves as to their preferred sources of funding and the relation between leverage and financial constraints and profitability.

This approach is limited by the scope of available data, and in particular by the period when it was gathered (16 years), by the inability to capture some elements of the history of each company (eg. whether they suspended activity or not) and by the unavoidable subjectivity of the replies to the survey. Further application of more formalized methods is possible, but the correctness of results would depend on clearing of data.

We confirmed that low leverage seemed to be the conscious choice of the Polish firms who could afford it, thus a preferred option according to the “pecking order” were own funds. Financially weaker or smaller companies could be constrained to rely on debt. The slow growth of loans to companies contributed to delay until late 2007 the moment when Polish banks exhausted internal deposits and were obliged to turn to external funding.

The paper reveals a new and until now unexplored layer of factors underpinning the robustness of national economies in the global crisis, namely company decisions .