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Corporate Leverage and Investment

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Abstract

In this article, we examine the relationship between high corporate leverage and future firm investment spending on structures, machinery, and equipment. In other words, we examine how debt influences the growth of a firm’s capital stock or fixed assets. We find that, on average, more leveraged firms across industries tend to have lower levels of investment activity in the future. Specifically, we find that the negative relationship between debt and investment is strongest for the most highly indebted firms and is evident in both economic downturns and expansions.

Suggested Citation

  • Karna Chelluri & W. Blake Marsh & David Rodziewicz, 2020. "Corporate Leverage and Investment," Economic Review, Federal Reserve Bank of Kansas City, vol. 0(no.1), pages 37-55, February.
    • Handle: RePEc:fip:fedker:87668
    DOI: 10.18651/ER/v105n1MarshRodziewicz
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    File URL: https://www.kansascityfed.org/documents/489/2020-Corporate%20Leverage%20and%20Investment.pdf
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    More about this item

    Keywords

    Firms; Corporate Leverage; Investments;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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