Leverage and corporate investment – a cross country analysis
-
Author(s)Souvik BanerjeeLink to ORCID Index: https://orcid.org/0000-0001-9988-8887
,
Amarnath MitraLink to ORCID Index: https://orcid.org/0000-0002-1842-9994
,
Debaditya MohantiLink to ORCID Index: https://orcid.org/0000-0002-0014-8158
-
DOIhttp://dx.doi.org/10.21511/imfi.20(3).2023.11
-
Article InfoVolume 20 2023, Issue #3, pp. 126-136
- Cited by
- 392 Views
-
121 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The paper examines the impact of a firm’s financial leverage on its investment decisions in the period 2011–2019, which occurred between two financial crises (2008–2010 and 2020–2022) and was globally marked by low interest rates and high leverage. The study focuses on non-financial listed firms in world’s top 13 largest economies consisting of 11 OECD+ countries and two emerging nations. The analysis explores the relationship between firm leverage and investment decisions, considering the growth opportunities and corporate risks of the firms, as well as the type of economy they operate in. The findings indicate that, overall, there is a negative relationship between leverage and investment. In developed nations, such as the OECD+ countries, this negative effect is more pronounced for firms with limited growth opportunities. Contrary to the existing literature, emerging economies exhibit a positive relationship between firm leverage and investment. Specifically, in China and India, firms with low growth opportunities display a stronger positive correlation between leverage and investment. These results suggest that in developed countries, debt continues to have a disciplining effect on firm investment, even in a high liquidity environment. However, in high-growth emerging economies, both firm management and lending institutions show less concern regarding leverage. Lastly, the study finds that firm risk has an adverse impact on investment decisions. These empirical findings highlight the non-uniform nature of the relationship between firm leverage and investment, which depends on the type of economy and the growth opportunities of the firms.
Acknowledgments
The infrastructural support provided by Management Development Institute, Murshidabad, India and FORE School of Management, New Delhi, India in completing this paper is gratefully acknowledged.
- Keywords
-
JEL Classification (Paper profile tab)G10, G30, G31
-
References22
-
Tables6
-
Figures1
-
- Figure 1. Country-wise number of non-financial firms included in the sample
-
- Table 1. Top 15 countries in the world in terms of total market capitalization
- Table 2. Descriptive statistics of model variables
- Table 3. Correlation analysis of model variables
- Table 4. Impact of leverage on firm investment: result based on the complete sample
- Table 5. Impact of leverage on firm investment: result based on OECD+ countries
- Table 6. Impact of leverage on firm investment: results based on emerging countries
-
- Aivazian, V. A., Ge, Y., & Qiu, J. (2005). The impact of leverage on firm investment: Canadian evidence. Journal of Corporate Finance, 11(1-2), 277-291.
- Borio, C., & Gambacorta, L. (2017). Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness? Journal of Macroeconomics, 54, 217-231.
- Chen, Z., & Xiong, P. (2002). The illiquidity discount in China (Working paper). International Center for Financial Research, Yale University.
- Denis, D. J., & Denis, D. K. (1993). Managerial discretion, organizational structure, and corporate performance: A study of leveraged recapitalizations. Journal of Accounting and Economics, 16(1-3), 209-236.
- Faccio, M., Marchica, M. T., & Mura, R. (2011). Large shareholder diversification and corporate risk-taking. The Review of Financial Studies, 24(11), 3601-3641.
- Firth, M., Lin, C., & Wong, S. M. (2008). Leverage and investment under a state-owned bank lending environment: Evidence from China. Journal of Corporate Finance, 14(5), 642-653.
- García, J. D. A., & Lorente, J. D. V. (2014). Istraživanje veze između menadžment ishoda i investicionih performansi preduzetnika [Exploring the link between managerial outcomes and investment performance of entrepreneurs]. Serbian Journal of Management, 9(2), 183-202. (In Serbian).
- Hall, R. E. (2017). Commentary: Low Interest Rates: Causes and Consequences. International Journal of Central Banking, 13(3), 103-117.
- Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. The American Economic Review, 76(2), 323-329.
- John, K., Litov, L., & Yeung, B. (2008). Corporate governance and risk-taking. The Journal of Finance, 63(4), 1679-1728.
- Kang, J. K., Shivdasani, A., & Yamada, T. (2000). The effect of bank relations on investment decisions: An investigation of Japanese takeover bids. The Journal of Finance, 55(5), 2197-2218.
- Kraiczy, N. D., Hack, A., & Kellermanns, F. W. (2015). What makes a family firm innovative? CEO risk-taking propensity and the organizational context of family firms. Journal of Product Innovation Management, 32(3), 334-348.
- Lang, L., Ofek, E., & Stulz, R. (1996). Leverage, investment, and firm growth. Journal of Financial Economics, 40(1), 3-29.
- McConnell, J. J., & Servaes, H. (1995). Equity ownership and the two faces of debt. Journal of Financial Economics, 39(1), 131-157.
- Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297.
- Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175.
- Mykhayliv, D., & Zauner, K. G. (2017). The impact of equity ownership groups on investment: Evidence from Ukraine. Economic Modelling, 64, 20-25.
- Peyer, U. C., & Shivdasani, A. (2001). Leverage and internal capital markets: evidence from leveraged recapitalizations. Journal of Financial Economics, 59(3), 477-515.
- Rosenberg, M. M. (2004). Firm risk, investment, and employment growth. Journal of Economics and Finance, 28(2), 164-184.
- Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3-27.
- Umutlu, M. (2010). Firm leverage and investment decisions in an emerging market. Quality & Quantity, 44, 1005-1013.
- Vo, X. V. (2019). Leverage and corporate investment – Evidence from Vietnam. Finance Research Letters, 28, 1-5.
-
The mediating effect of investment decisions and financing decisions on the effect of corporate risk and dividend policy against corporate value
Investment Management and Financial Innovations Volume 14, 2017 Issue #2 pp. 27-37 Views: 1567 Downloads: 773 TO CITE АНОТАЦІЯThis study aims to determine the effect of mediation decisions on investment, and financing decisions influence the company’s risk and dividend policy on firm value. The unit of analysis in this research is company property and real estate sectors listed in Indonesia Stock Exchange continuously for 9 years (2001-2008) that have a complete financial report on the study period. This research study using descriptive analysis and inferentsial to prove examine the relationship between the study variables with the five structural models using WarpPLS. This study is basically to analyze the patterns of relationships between variables in order to determine the effect of directly or indirectly, a set of independent variables (exogenous) to the dependent variable (endogenous). The company’s risk and investment decisions are able to increase the value of the company, while the dividend policy and funding decisions are not able to increase the value of the company, the study was conducted at the companies in the sectors of property and real estate, then this study better developed for other sectors that have different characteristics. Originality from this research is the populations in this study were the companies in the sectors of property and real estate with specific criteria Indonesia and the data used in this study were secondary data obtained from the Indonesia Stock Exchange in the form of financial statements.
-
On the causality analysis of the correlation between financial leverage and systematic risk: evidence from Indonesian Stock Exchange
Ibnu Qizam
doi: http://dx.doi.org/10.21511/imfi.14(4).2017.08
Investment Management and Financial Innovations Volume 14, 2017 Issue #4 pp. 73-89 Views: 1269 Downloads: 362 TO CITE АНОТАЦІЯThis research is aimed at analyzing the causality puzzle on the correlation between financial leverage and systematic risk (beta). Financial leverage and beta are usually considered as two proxies of risk derived from different domains: one ends at financial decision outcome, and the other points to market. Cross-sectionally, this result does not support the moderating-variable impact of size on the relation between financial leverage and systematic risk. On the other hand, however, the moderating-variable impact of industry and operating leverage (to some extent) on the relation between financial leverage and systematic risk were well documented. Inter-temporally, financial leverage is significantly and symmetrically related to beta, not moderated by size and operating leverage. This means that the two variables show bidirectional causality. This study contributes to the new insight that financial leverage and beta are the two variables with bidirectional causality, showing that in the long run, risks from fundamental (financial/micro-economy) and from market (macro-economy) are tightly linked to each other inter-temporally.
-
Assessing the financial performance of airlines in the Asia-Pacific region
Carol C. Huang
doi: http://dx.doi.org/10.21511/imfi.18(2).2021.19
Investment Management and Financial Innovations Volume 18, 2021 Issue #2 pp. 234-244 Views: 1232 Downloads: 1403 TO CITE АНОТАЦІЯIn recent years, the aviation industry in the Asia-Pacific region has experienced rapid growth. Despite facing thin and volatile profit margins, the region’s airlines continue to expand their capacity by using high financial leverage, raising concerns of whether they are utilizing such financial leverage effectively and how it affects their stock performance. Using the global Malmquist productivity index and the conditional value-at-risk measure, this study investigates the financial performance of 22 Asia-Pacific-based airlines during 2016–2019. The empirical results reveal that only three full-service airlines were able to maintain continued improvement in financial efficiency during the sample period. The excessive use of financial leverage among low-cost carriers is documented. To assess the sources of financial inefficiency, this study decomposed the global Malmquist productivity index into two components: efficiency change and technical change. The results show that while there was a trend toward efficiency catch-up among the carriers, the number of airlines that demonstrated sufficient technical change declined significantly, indicating the need to implement technological innovation to deliver better financial outcomes. Regarding the airline’s stock return performance, airlines that achieved continuously superior performance in deploying financial resources also saw the lowest downside risk in their stock returns, reinforcing the importance of devoting more attention to indebtedness and the effectiveness with which financial resources are used. The findings of this study offer suggestions to airlines in managing their capital structure and enhancing their financial stability.
