The Impact of Leverage on Firm Investment: Evidence from Korea

Abstract

This study examines the impact of financial leverage on the firms' investment behavior of Korean firms. An analysis of 25437 firms (both listed and non-listed) for the period of 2010-2019 shows that leverage is negatively related to investment. The finding is robust even after using alternative measures for leverage, investment, cash flow and the instrumental variable approach to deal with the endogeneity problem inherent in the relationship between leverage and investment. The negative relationship between leverage and investment is stronger in manufacturing and larger firms. On the contrary, the negative relationship is weaker in firms with high growth opportunities, high cash flow, and high leverage. However, the listing status does not indicate any differential relationship between leverage and investment.

Keywords: Investment, leverage, Bank debt, Korean Firms, Panel Data, listed and non-listed