This paper investigates whether there are systematic differences in the capital structure formation of local companies and subsidiaries of multinational companies (MNCs) operating in the Baltic States over the period from 2000 to 2008. The analysis is based on panel data estimation on a sample covering 87,000 company-year observations. We find local companies to be more leveraged than MNCs, mainly explained by use of intra group equity financing, lower investment intensity and higher profit retention of the latter. However, MNCs appear to have had better access to external finance, resulting in their competitive advantage over local companies, especially in periods characterised by significant credit constraints. In contrast, local companies appear to have started to increase their leverage under relaxed credit constraints during the years of economic boom, demonstrating local companies' greater vulnerability to adverse cyclical effects.

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This paper investigates the impact of leverage on labour productivity of companies operating in the Baltic countries, with a focus on differences between local and multinational companies. We employ a fixed effects regression model on company level data, covering the period from 2001 to 2008. Our results demonstrate that the impact of leverage on labour productivity is non-linear and it differs dramatically between local and multinational companies. In the case of local companies, at low levels of leverage, an increase in external financing tends to bring along an improvement in labour productivity, while at higher levels of leverage an increase in debt financing appears to result in a loss of labour productivity. For multinational companies, the impact of leverage on labour productivity tends to be more linear and leverage appears to have a negative impact on labour productivity. Although debt overhang is believed to be an issue in the Baltic countries in general, local companies with low leverage might be able to increase labour productivity by additional borrowing.

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Although they are instrumental for economic development, productivity-enhancing corporate investments may increase the financial vulnerability of companies, especially in an economic and financial crisis. We employ an instrumental probit model with the aim of finding evidence for the investment and credit patterns that led companies into financial distress during the global financial crisis 2009-2010. The company-level micro-data for our study on three Central and East European countries-Hungary, Bulgaria, Romania and two Baltic countries, Latvia and Lithuania-originates from two independent surveys, the Business Environment and Enterprise Performance Survey conducted in 2008 and the Financial Crisis Survey conducted in 2009/2010. Both were carried out jointly by the EBRD and the World Bank. Our results emphasize a substantial adverse impact from investment intensity and debt financing on company financial soundness during a crisis. On top of that, we discover a strong non-linear pattern in the sensitivity of company distress to its investmentfinancing nexus.