The impact of financial leverage on investment decisions: evidence from developed and emerging markets

The factors affecting the investment and impact of the debt on investment are fundamental issues in corporate finance. With 2000s, as private sector borrowing rates have reached high levels, the relationship between investment and borrowing have become remarkable. The aim of this study is to examine the effect of financial leverage on investment decisions of companies in developed and emerging countries. Data of the companies that traded in the stock markets of five developed countries including USA, Germany, France, Britain and Japan and six developing countries including Brazil, India, South Africa, Indonesia, China and Turkey between the years 2005- 2015 are evaluated. The impact of borrowing, cash flow, sales and Tobin Q ratio values on investment decisions was mainly analyzed by panel data analysis and two-step least squares method. Although, findings differ from country to country, it is observed that leverage has negative effect on investment. In contrast to developed countries where the effect is very high, in developing countries, observed effect is low. In developed countries, the investment decision is boosted by the sales variable in positive direction, whereas in developing countries, this boost is provided from the cash flow variable. In companies with low growth potential, the negative impact of financial leverage is stronger than that of companies with high growth potential.