Leverage-value nexus in Italian small-medium enterprises: further evidence using dose-response function

Purpose - We introduce a new approach to the leverage-value relationship. Besides applying the classical regression models, we deal with leverage as a continuous treatment variable implemented on the firm’s value using the Dose-Response Function (DFR). Design/methodology/approach - After proper model calibration and splitting the treatment (leverage) into ten doses, a response function is generated, which enables the realization of the dose level at which the firm’s value is maximized. Furthermore, we test the pecking order theory and the trade-off theory using the Threshold Model to see whether firms are under or over-indebted. The analysis is carried out on panel data from Small-Medium Enterprises (SMEs), providing more valuable insights than large and mature companies. Findings - We used two leverage measures, Total Liabilities Ratio and Bank Debt Ratio. Value is measured by the market capitalization and Tobin’s Q. In general, we find a positive relationship between leverage and value; pecking order theory is not strongly supported, firms are below their optimal leverage, and there is a certain leverage dose that would maximize firms’ value. Practical implications - Since the threshold model and DRF show that SMEs are under indebted, firms could benefit from extra leverage doses without affecting the firm’s risk profile, especially in a low-interest rate regime, and the potential increase in public-private expenditure after Italy obtained the European Recovery Funds. Originality - We contribute to new knowledge and understanding to leverage and SMEs Finance from new methodological perspectives offering valuable insights from SMEs using novel approaches.