The impact of leverage on firm investment: Canadian evidence |
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| Institution: | 1. Department of Economics and Rotman School of Management, University of Toronto, 150 St. George Street, Toronto, ON, Canada M5S 3G7;2. School of International Trade and Economics, University of International Business and Economics, Beijing, P.R. China;3. Finance Area, School of Business and Economics, Wilfrid Laurier University, 75 University Avenue West, Waterloo, ON, Canada N2L 3C5;1. Esaan Center for Business and Economic Research, Faculty of Management Science, Khon Kaen University, Muang, Khon Kaen 40002, Thailand;2. Miyazaki International College, 1405 Kano, Kiyotake, Miyazaki 889-1605, Japan;1. Universidad Carlos III de Madrid, Spain;2. Universidad Autónoma de Madrid, Spain;3. IESE Business School, University of Navarra, Av. Pearson, 21, 08034 Barcelona, Spain;1. School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology University (RMIT), Australia;2. Swin burne Business School, Swin burne University of Technology, Australia |
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| Abstract: | This study examines the impact of financial leverage on the firms' investment decisions using information on Canadian publicly traded companies. It shows that leverage is negatively related to investment and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities. The paper tests the robustness of these results using alternative empirical models and, in addition, uses the instrumental variable approach to deal with the endogeneity problem inherent in the relationship between leverage and investment. The results provide support to agency theories of corporate leverage, and especially the theory that leverage has a disciplining role for firms with low growth opportunities. |
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