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Leverage and firm investment: the role of information asymmetry and growth

Author

Listed:
  • Albert Danso
  • Theophilus Lartey
  • Samuel Fosu
  • Samuel Owusu-Agyei
  • Moshfique Uddin

Abstract

Purpose - This paper aims to demonstrate how financial leverage impacts firm investment and the extent to which this relationship is conditional on the level of information asymmetry as well as growth. Design/methodology/approach - The paper relies on data from 2,403 Indian firms during the period 1995-2014, generating a total of 19,544 firm-year observations. Analysis is conducted by using various panel econometric techniques. Findings - Drawing insights from agency theories, the paper uncovers that financial leverage is negatively and significantly related to firm investment. It is also observed that the impact of financial leverage on firm investment is significant for high information asymmetric firms. Finally, the paper shows that the relationship between leverage and firm investment is significant for low-growth firms. However, no significant relationship is found between leverage and investment for high-growth firms. Originality/value - This paper provides fresh evidence on the leverage–investment nexus and, to the authors’ knowledge, it the first paper to examine the extent to which this leverage–investment relationship is driven by the level of information asymmetry.

Suggested Citation

  • Albert Danso & Theophilus Lartey & Samuel Fosu & Samuel Owusu-Agyei & Moshfique Uddin, 2019. "Leverage and firm investment: the role of information asymmetry and growth," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 27(1), pages 56-73, March.
    • Handle: RePEc:eme:ijaimp:ijaim-10-2017-0127
    DOI: 10.1108/IJAIM-10-2017-0127
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    Citations

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    Cited by:

    1. Ahmad, Muhammad Munir & Hunjra, Ahmed Imran & Taskin, Dilvin, 2023. "Do asymmetric information and leverage affect investment decisions?," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 337-345.

    More about this item

    Keywords

    India; Leverage; Information asymmetry; Investment; G14; G30; G31; G32;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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