Debt Financing And Investment Spending Empirical Research

A central issue in finance is whether leverage affects investment policies. Neoclassic finance theory maintains that leverage is irrelevant with investment. A firm with good projects can grow no matter how its capital structure is, because it can always find funding to invest. Considering the informational asymmetries and agency problems, modern finance theory accepts the view that leverage affects investment policies. However, there are also two sides about this view. On one side, the researchers think a firm's debt induces under-investment because leverage prevents a firm from raising funds to finance positive net present value(NPV) projects. Namely, leverage restrains a firm's valuable investments. On the other side, the researchers think a firm's debt has a disciplinary role on over-investment, because leverage prevents a firm from accepting negative NPV projects. Meanwhile, there are different empirical research conclusions. Although foreign researchers find that leverage plays a disciplinary role, Chinese researchers almost don't find debt's disciplinary role. Clarifying this point is important for choosing a firm's capital structure and investment policies.The essay surveys researches on the influence of asymmetric information and agency on investment behavior and improves the research design. Based on 370 manufacturing listed companies' data from 2000 to 2004,the essay researches on the relationship between leverage and investment after controlling for the variables that influence a firm's investment such as Tobin's Q, sales income and cash. We find a remarkable negative relationship between leverage and investment. The negative relationship holds for both "high-growth" firms and "low-growth" firms. That means debt plays a restraining role on "high-growth" firms' investment and plays a disciplinary role on "low-growth" firms' investment. While we find only short-term debt or business credit influence the investment negatively. Long-term debt or bank credit looks "soft budget" for the samples. We conclude there are two faces of debt. We should consider the debt's governing power and improve its disciplinary role. At the same time, we should also increase the debt contract's flexibilities to push the firm's investment. And the "soft-budget" should be altered.