Leverage cyclicality and the role of collateral: A comparative study of SMEs and large firms

Leverage cyclicality of small firms is meagerly researched. This article investigates leverage cyclicality of Indian small and medium enterprises (SMEs) and large firms, from fiscal year 1999 to 2019. Extant literature attributes procyclical leverage of small firms/constrained firms to procyclically varying collateral. Contrary to extant literature, we find that leverage is countercyclical for SMEs and procyclical for large firms. Collateral has significant procyclical impact on leverage of SMEs and countercyclical impact on leverage of large firms. Thus, firm size and collateral have opposite impact on leverage cyclicality. This study uses endogenous sample breakpoints to obtain two size based subsamples. These subsamples can be further segregated into four categories of firms. Each category exhibits a different combination of leverage cyclicality and cyclical impact of collateral. Presence of distinct categories within the sample of SMEs informs differentiated policy response during economic downturns.