An Empirical Test On The Impact Of Debt Financing On Listed Company Investment

The theory of capital structure shows that the impact of debt financing on firm investment has both negative effect and positive effect. The positive effect means that leverage is one mechanism for overcoming the overinvestment problem where the conflict is between the shareholders and management. The negative impact is that debt overhang reduces the incentives of the shareholder-management coalition to invest in positive net-present-value investment opportunities, which creates potential underinvestment and asset substitution. Such inefficiency investment behavior comes from the conflict between creditors and shareholders (management). Based on the classical theory and the case of listed companies, this paper examines the impact of debt financing on firm investment behavior.The study shows that debt financing is negatively related to investment and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities. The results provide support to the theory of capital structure, and especially the theory that leverage has a disciplining role for the firms with low growth opportunities. The further study finds that the equity structure plays an important role between the debt financing and firm investment. Compared to firms controlled by country stock, leverage has a significantly stronger negative impact on other type firms with both low growth opportunities and high growth opportunities. That means debt financing is more of a constraint on investment in private firms than in state owned firmsFinally, according to the results of our study, the paper offers some propositions to both business enterprise management and government economic policies.