Corporate Leverage and Investment in Portugal

Ana Martins (), José Henrique Gonçalves () and João Mário Ferreira Duque ()
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Ana Martins: GEE - Gabinete de Estratégia e Estudos do Ministério da Economia
José Henrique Gonçalves: GEE - Gabinete de Estratégia e Estudos do Ministério da Economia

No 100, GEE Papers from Gabinete de Estratégia e Estudos, Ministério da Economia

Abstract: This analysis aims at assessing the decrease of investment induced by an increase in debt of an excessively indebted corporate sector in Portugal, testing empirically the relationship between corporate indebtedness and investment. The results show evidence of a negative relationship between firms’ investment-to-capital ratio and their indebtedness over the period 2010-15. This type of relation between these variables suggests the need for companies to deleverage. Results also point to asymmetric effects beyond a certain threshold level of indebtedness, namely a debt-to-asset ratio of 45.6%, because greater access to debt can help increase investment levels, but excess leverage can reverse these benefits by raising corporate vulnerabilities. Relationship between debt and investment was also tested along firm sector to deepen the role of firm sector heterogeneity and a negative relationship was also found in the three major sectors (Wholesale and retail, Manufacturing and Construction).

Keywords: Corporate debt; leverage; investment; threshold (search for similar items in EconPapers)
JEL-codes: E22 F34 G31 G32 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2018-03, Revised 2018-03
New Economics Papers: this item is included in nep-cfn
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https://www.gee.gov.pt//RePEc/WorkingPapers/GEE_PAPERS_100.pdf First version, 2018 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mde:wpaper:0100

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