Does sub-Saharan Africa overinvest? Evidence from a panel of non-financial firms

Wafa Khémiri and Hédi Noubbigh

The Quarterly Review of Economics and Finance, 2020, vol. 77, issue C, 118-130

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.

Keywords: Overinvestment; Investment efficiency; Leverage; Agency theory; Dynamic panel data; Sub-Saharan Africa (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:77:y:2020:i:c:p:118-130

DOI: 10.1016/j.qref.2019.11.005

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