An Empirical Study On Leverage, Debt Maturity And Firm Investment

Two important areas of research in corporate finance are investment and financial decision. These two issues, although often studied separately through financial decision on investment , are fundamentally mutual process.This paper explores the interactive effect of financial decision and investment .The paper examines interactions between the firm's financing and investmentdecisions. Using a sample of 205 listed manufacturing companies of Shanghai and Shenzhen stock markets from 1998 to 2005, It develops a system-based approach that allows one to investigate the effects of growth opportunities upon the firm's choices of leverage and debt maturity ex ante, and the effects of this financing policy upon the firm's optimal investment strategy ex post. The finding shows that high-growth firms control underinvestment incentives by reducing leverage but not by shortening debt maturity ex ante. There is a positive relationship between leverage and maturity, as predicted by the liquidity risk argument. The results provide partial support for the agency theories of corporate financing and show that the firm's initial joint choice of leverage and maturity is strongly driven by liquidity risk and financial flexibility considerations. The paper also documents a negative effect of leverage upon investment ex post, supporting the hypothesis that leverage has a disciplining role for firms with limited growth opportunities.