On The Investment Sensitivity Of Debt Under Uncertainty

Date Added: Oct 2009
Format: PDF

The authors investigate the impact of debt on a panel of U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and market-level uncertainty changes. Their estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty. Researchers have expended considerable effort in trying to understand the effects of capital structure on the investment behavior of a firm. It is well understood that preexisting debt may discourage or distort firms' capital investment activities, for part of the increase in firm value from new investment projects will accrue to existing debt-holders.