Abstract
This paper investigates the link between financial leverage and corporate investment for a group of five sub-Saharan African countries. Using firm-level data from 2004 to 2014, we postulate a linear and nonlinear corporate leverage-investment relationship. The results obtained by the system GMM estimation and quadratic methods are aligned with the predictions of the agency theory. We find a non-linear relationship between long-term debt and corporate investment. This translates into the fact that there is an optimal leverage threshold, below which sub-Saharan firms do not face an overinvestment risk. Nevertheless, beyond this threshold, they bear overinvestment risk. Firm-specific (in particular, IFRS and corporate tax) and macroeconomic determinants also play a powerful role in determining the optimal investment strategy.
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