Original Research

The impact of leverage on investment decisions for South African firms with different growth opportunities

Miriam Mondosha, Akios Majoni
Journal of Economic and Financial Sciences | Vol 11, No 1 | a192 | DOI: https://doi.org/10.4102/jef.v11i1.192 | © 2018 Miriam Mondosha, Akios Majoni | This work is licensed under CC Attribution 4.0
Submitted: 09 February 2018 | Published: 28 June 2018

About the author(s)

Miriam Mondosha, Department of Finance and Tax, University of Cape Town, South Africa
Akios Majoni, Department of Finance and Tax, University of Cape Town, South Africa

Abstract

Research has documented a significant relationship between financial leverage and investment decisions, however divergent views exist about whether this relationship is explained by the underinvestment hypothesis or the overinvestment hypothesis. This study examines the relationship between financial leverage and investment decisions for firms with different growth opportunities, it is based on a sample of 51 industrial sector firms listed on the Johannesburg Stock Exchange (JSE), South Africa, over the period from 2008 to 2014. Using panel data and after controlling for heterogeneity across firms, we report a negative relationship between leverage and investment. However, the relationship is significant for firms with high growth opportunities and insignificant for firms in the low growth category. The results support the underinvestment theory that debt overhang reduces the incentives of firms exploiting valuable opportunities.

Keywords

leverage; investment; debt; South Africa; over-investment; under-investment

Metrics

Total abstract views: 7028
Total article views: 6708

 

Crossref Citations

1. Do the macroeconomic factors influence the firm's investment decisions? A generalized method of moments (GMM) approach
Umar Farooq, Jaleel Ahmed, Shamshair Khan
International Journal of Finance & Economics  vol: 26  issue: 1  first page: 790  year: 2021  
doi: 10.1002/ijfe.1820

2. Asymmetric Information and Agency Cost of Financial Leverage and Corporate Investments: Evidence from Emerging South-East European Countries
Aleksandar Naumoski, Sasho Arsov, Violeta Cvetkoska
Scientific Annals of Economics and Business  vol: 69  issue: 2  first page: 317  year: 2022  
doi: 10.47743/saeb-2022-0010

3. Measuring the Impact of Country-level Governance on Corporate Investment: A New Panel Data Evidence
Umar Farooq, Mosab I. Tabash, Mahmoud Al-Rdaydeh, Mamdouh Abdulaziz Saleh Al-Faryan
Global Business Review  year: 2022  
doi: 10.1177/09721509221112993

4. How does green innovation determine corporate physical investment? New empirical evidence
Sisi Chen, Umar Farooq, Mosab I. Tabash, Mohammad Mahtab Alam, Khurshid Khudoykulov
Technological and Economic Development of Economy  vol: 32  issue: 1  first page: 233  year: 2025  
doi: 10.3846/tede.2025.24455

5. Population intensity, location choice, and investment portfolio selection: A case of emerging economies
Xinao He, Runguo Xu, Kai Sun, Jian Wang
International Review of Financial Analysis  vol: 94  first page: 103271  year: 2024  
doi: 10.1016/j.irfa.2024.103271

6. Leverage, Growth Opportunities, and Credit Risk: Evidence from Italian Innovative SMEs
Alberto Manelli, Roberta Pace, Maria Leone
Risks  vol: 10  issue: 4  first page: 74  year: 2022  
doi: 10.3390/risks10040074