Leverage and corporate investment – a cross country analysis

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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.

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    • 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
    • Conceptualization
      Souvik Banerjee
    • Data curation
      Souvik Banerjee, Amarnath Mitra, Debaditya Mohanti
    • Formal Analysis
      Souvik Banerjee, Amarnath Mitra
    • Investigation
      Souvik Banerjee, Amarnath Mitra
    • Methodology
      Souvik Banerjee, Amarnath Mitra, Debaditya Mohanti
    • Project administration
      Souvik Banerjee
    • Resources
      Souvik Banerjee, Amarnath Mitra
    • Software
      Souvik Banerjee, Amarnath Mitra, Debaditya Mohanti
    • Supervision
      Souvik Banerjee
    • Writing – original draft
      Souvik Banerjee
    • Writing – review & editing
      Souvik Banerjee, Amarnath Mitra, Debaditya Mohanti
    • Validation
      Amarnath Mitra
    • Visualization
      Amarnath Mitra