Leverage, Debt Maturity and Firm Investment: An Empirical Analysis

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.

Ownership structure, control contestability, and corporate debt maturity

“…We find that the coefficients and significance levels for MLSD, WEDGE, and SIZE are almost identical to those observed in specification (1). Moreover, consistent with prior research (e.g., Dang, 2011;Johnson, 2003;Lin et al, 2013;Stohs and Mauer, 1996;Zheng et al, 2012), we find that the coefficient estimate on LEVERAGE_RATIO is positive and statistically significant at the 1% level. This finding indicates that firms with higher leverage are more willing to choose longer maturity debt than their counterparts with lower leverage ratios, to avoid liquidity risk (Diamond, 1991).…”

Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models

“…Using the concept of half-life, this suggests that UK firms only need between 0.91 and 0.76 years to halve their deviation from target leverage. These speeds are consistent with the previously reported UK results (Dang, 2011;Ozkan, 2001) but faster than the speeds estimated for US firms (Flannery and Rangan, 2006;Huang and Ritter, 2009;Lemmon et al, 2008).…”

“…Using Datastream's research sample (comprising Comma required: 1,683 firms), we collected company accounting data from the earliest possible year to January 2004 and constructed an unbalanced panel of nearly 20,000 firm-year observations. Following previous studies (e.g., Antoniou et al, 2008;Dang, 2011;Ozkan, 2001), we applied a number of standard data restrictions. First, firms operating in financial sectors (banks, insurance and life assurance companies and investment trusts) and in utility sectors (electricity, water and gas) were excluded since they are subject to different accounting considerations.…”

An integrated model of capital structure to study the differences in the speed of adjustment to target corporate debt maturity among developed countries

“…The result is consistent with the avoidance of financing growth opportunities with long-term debt: once the growth opportunities are exercised, value is generated for the company. On the other hand, the result for British companies is consistent with the findings of Dang (2011) that UK companies control the underinvestment problem by reducing leverage, but not by shortening the maturity of their debt. Table 4 The adjustment speed to the optimal debt maturity ratioper country Notes: The table contains the results of the regressions by country: Germany, Denmark, Spain, Italy, USA, Australia, Belgium, UK, and France for the period 1996-2008, where the dependent variable is LTDTD corresponding to the long-term debt over total debt.…”