Abstract
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. © 2010 Blackwell Publishing Ltd.
| Original language | English |
|---|---|
| Pages (from-to) | 225-258 |
| Number of pages | 33 |
| Journal | Journal of Business Finance and Accounting |
| Volume | 38 |
| Issue number | 1-2 |
| DOIs | |
| Publication status | Published - Jan 2011 |
Keywords
- Capital Structure
- Debt Maturity
- Dynamic Panel Data
- Investment
- Leverage