The effects of financial leverage and debt maturity on the investments of Brazilian electric sector companies

Abstract

Purpose -This research aimed to verify how companies of the electric energy segment choose levels of financial leverage and debt maturity in order to alleviate the underinvestment problem.Design/methodology/approach -A multiple linear regression was carried out in a dynamic panel model to verify the relevance of these and other variables to the companies' investments.Findings -The explanatory variable of investments carried out in the previous year was significant in the regressions, with a positive sign as expected. The financial leverage variable was significant and negative. The investments made by the companies are negatively related to indebtedness.Originality/value -It was identified that the maturity of debts of companies with low growth opportunities shows a negative relationship with the level of investment. Thus, in the electricity sector, reducing debt maturity can be considered as a substitute for reducing indebtedness in controlling underinvestment. Due to the relevance of this sector to the economy and the need for constant investments in it, understanding its financing dynamics provides an important contribution either to researchers or to managers of this industry.

Debt maturity structure and firm investment in the financially constrained environment

“…Conversely, the low growth firms are considered very sensitive compared to the high growth firms (Danso et al. , 2019; Odit and Chittoo, 2008; Yuan and Motohashi, 2014), and thus maturity of the debts with low growth opportunities lead to a negative relationship with the level of investment (Kuroda et al. , 2019).…”

“…Aivazian et al, 2005a, b;Ahn et al, 2006;Kim, 2014;Crouzet, 2016;Jungherr and Schott, 2016;Dang, 2011;Esho et al, 2002) and the leading emerging markets (e.g. Bhat et al, 2020;Yuan and Motohashi, 2014;Kuroda et al, 2019;Tekçe, 2011;Aygun et al, 2014;Khaw and Lee, 2016;Danso et al, 2019). On the contrary, studies in the context of less developed countries remains largely neglected (Khaw and Lee, 2016;Khan et al, 2020).…”

“…Aivazian et al, 2005a;Ahn et al, 2006;Kim, 2014;Crouzet, 2016;Jungherr and Schott, 2016), UK (Dang, 2011), Australia (Esho et al, 2002) and Canada (Aivazian et al, 2005b). Similarly, few studies have focused the leading emerging economies including China (Bhat et al, 2020;Yuan and Motohashi, 2014), Turkey (Tekçe, 2011;Aygun et al, 2014), Brazil (Kuroda et al, 2019), Malaysia (Khaw and Lee, 2016) and India (Danso et al, 2019). However, the research in the context of less developed countries remains largely neglected (Khaw and Lee, 2016;Khan et al, 2020;Gul et al, 2012).…”

“…The firms having high growth opportunities tend to use short-term financing extensively in their investment decisions because long-term financing may lead to debt overhang and distort investment (Ozkan, 2002). Conversely, the low growth firms are considered very sensitive compared to the high growth firms (Danso et al, 2019;Odit and Chittoo, 2008;Yuan and Motohashi, 2014), and thus maturity of the debts with low growth opportunities lead to a negative relationship with the level of investment (Kuroda et al, 2019). Furthermore, formerly scholars established that debt maturity has a negative association with firms' growth opportunities (Barclay et al, 2003;Scherr and Hulburt, 2001).…”

“…, 2020; Yuan and Motohashi, 2014), Turkey (Tekçe, 2011; Aygun et al. , 2014), Brazil (Kuroda et al. , 2019), Malaysia (Khaw and Lee, 2016) and India (Danso et al.…”