Leverage and firm investment: the role of information asymmetry and growth

Abstract

This paper demonstrates how financial leverage impacts firm investment and the extent to which this relationship is conditional on the level of information asymmetry as well as growth. The paper relies on data from 2403 Indian firms during the period 1995–2014, generating a total of 19,544 firm-year observations. Analysis is conducted by using various panel econometric techniques. Drawing insights from agency theories, the paper uncovers that financial leverage is negatively and significantly related to firm investment. It is also observed that the impact of financial leverage on firm investment is significant for high information asymmetric firms. Finally, the paper shows that the relationship between leverage and firm investment is significant for low-growth firms. However, no significant relationship is found between leverage and investment for high-growth firms. This paper provides fresh evidence on the leverage-investment nexus and, to the authors’ knowledge, it the first paper to examine the extent to which this leverage-investment relationship is driven by the level of information asymmetry.