Corporate Debt and Investment: A Firm Level Analysis for Stressed Euro Area Countries
39 Pages Posted: 17 Sep 2017
Date Written: September 12, 2017
Abstract
This paper investigates the link between corporate debt and investment for a group of five peripheral euro area countries. Using firm-level data from 2005-2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and significant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensified and firms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when profitability is low.
Keywords: Corporate debt, leverage, debt overhang, investment, threshold model
JEL Classification: E22, F34, G31, G32
Suggested Citation: Suggested Citation