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Leverage, Debt Maturity and Firm Investment: An Empirical Analysis


  • Viet A. Dang

    Corresponding author
    1. The author is from the Manchester Business School, University of Manchester. He would like to thank an anonymous referee, Abimbola Adedeji, Dan Coffey, Robert Hudson, Cesario Mateus, Peter F. Pope (editor), Kevin T. Reilly, Norman Strong and seminar discussants and participants at Manchester Business School Finance Seminar, the Financial Management Association (FMA) European Conference 2007 and the Financial Management Association (FMA) Annual Meetings 2008, for their helpful comments and suggestions that greatly improve the paper. All remaining errors are the author's own.
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Address for correspondence: Viet Anh Dang, Manchester Business School, MBS Crawford House, Booth Street West, University of Manchester, M15 6PB, UK. e-mail:


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.