Original Research
The impact of leverage on investment decisions for South African firms with different growth opportunities
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
Submitted: 09 February 2018 | Published: 28 June 2018
About the author(s)
Miriam Mondosha, Department of Finance and Tax, University of Cape Town, South AfricaAkios 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
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