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Corporate debt and investment: A firm-level analysis for stressed euro area countries

Stefan Gebauer, Ralph Setzer and Andreas Westphal

Journal of International Money and Finance, 2018, vol. 86, issue C, 112-130

Abstract: This paper investigates the link between corporate debt and investment for a group of five peripheral euro area countries. Using firm-level data from 2005 to 2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and significant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensified and firms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when profitability is low.

Keywords: Corporate debt; Leverage; Debt overhang; Investment; Threshold model (search for similar items in EconPapers)
JEL-codes: E22 F34 G31 G32 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:86:y:2018:i:c:p:112-130

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