Leverage, Investment, and Firm Growth

37 Pages Posted: 31 Aug 2010 Last revised: 12 Feb 2021

See all articles by Larry Lang

Larry Lang

Leonard N. Stern School of Business - Department of Economics

Eli Ofek

New York University (NYU) - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: July 1995

Abstract

We show that there is a negative relation between leverage and future growth at the firm level and, for diversified firms, at the segment level. Further, this negative relation between leverage and growth holds for firms with low Tobin's q, but not for high-q firms or firms in high-q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities, but is negatively related to growth for firms whose growth opportunities are either not recognized by the capital markets or are not sufficiently valuable to overcome the effects of their debt overhang.

Suggested Citation

Lang, Larry and Ofek, Eli and Stulz, Rene M., Leverage, Investment, and Firm Growth (July 1995). NBER Working Paper No. w5165, Available at SSRN: https://ssrn.com/abstract=1669104

Larry Lang (Contact Author)

Leonard N. Stern School of Business - Department of Economics

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New York, NY 10003
United States

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

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European Corporate Governance Institute (ECGI)

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