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The Impact of Leverage on Investment Expenditures Revisited: New Insights from Analyzing Private Firms

Recent research shows that firms with more debt invest less. Yet, the underlying reasons remain unclear. In this paper, we exploit some of the specific characteristics of unlisted enterprises to investigate the non-linear and multi-period aspects of theoretical asymmetric information and agency models explaining the leverage-investment relation. After addressing the endogeneity of leverage, our fixed effects regression results on a large sample of 64,246 private firm years support both non-linear and multi-period implications of credit constraints. Specifically, the data reveal a negative impact of leverage on investment, which decreases with the debt ratio but never turns positive. We also find some support for the agency model of underinvestment in a non-linear model, as relatively highly leveraged firms with substantial growth opportunities invest less.