Abstract
In this paper, we examine simultaneous relationship between leverage, maturity and over(under)- investment in emerging markets. We divide leverage into short term and long term to investigate the relation between current and future simultaneous relationship between leverage and investment decision, between debt maturity and investment decision, and between leverage and debt maturity. This research used twenty emerging market data from 2006 – 2016. First of all, our results show that firms in emerging markets prefer to use short-term debt to long-term debt to minimize the underinvestment problem. Second, there is a simultaneous non-linear relation between long-term leverage and growth opportunities in emerging markets firms. Third, long-term debt has non-linear effects on investment decision in emerging markets firms. It can be concluded that firms in emerging markets have different characteristics with regard to their capabilities to manage the interaction between leverage, maturity and investment compared to developed markets.
Highlights
Modigliani and Miller (1958) show that in a perfect capital market, financing and investment decisions are completely independent
This paper examines the simultaneous interaction of long-term & short-term leverage, debt maturity, and investment in emerging markets (Bangladesh, Brazil, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Philippines, Russia, South Africa, Thailand, Turkey, Ukraine, Venezuela, Vietnam, and Argentina)
Previous research has already examined the interaction of corporate financing and investment decisions in developed markets
Summary
Modigliani and Miller (1958) show that in a perfect capital market, financing and investment decisions are completely independent. Rich theoretical research has found various frictions that drive linkages between financing and investment decision. Based on the theoretical model from McConell and Servaes (1995) and Lang et al (1996), Aivazian et al (2005) find empirical evidence that leverage has a significant effect on investment. Myers (1977) points out that outstanding debt may distort the firm’s investment incentives downward to maximize equity value. On the contrary, Jensen and Meckling (1976) argue that for firms with large free cash flow, debts can be used as a disciplining device because it can reduce overinvestment in risky projects
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
