Leverage, Debt Maturity and Firm Investment: An Empirical Analysis
Journal of Business Finance and Accounting, Forthcoming
48 Pages Posted: 4 Mar 2008 Last revised: 20 Aug 2010
Date Written: April 1, 2010
In this paper, we examine the potential interactions of corporate financing and investment decisions in the presence of incentive problems. We develop a system-based approach to investigate the effects of growth opportunities on leverage and debt maturity as well as the effects of these financing decisions on firm investment. Using a panel of UK firms between 1996 and 2003, we find that high-growth firms control underinvestment incentives by reducing leverage but not by shortening debt maturity. There is a positive relation between leverage and debt maturity as predicted by the liquidity risk hypothesis. Leverage has a negative effect on firm investment levels, which is consistent with the overinvestment hypothesis regarding the disciplining role of leverage for firms with limited growth opportunities.
Keywords: Capital Structure, Leverage, Debt Maturity, Investment, Dynamic Panel Data
JEL Classification: G32
Suggested Citation: Suggested Citation