The Impact of Debt Financing on Firm Investment Behavior: Evidence from China

Abstract

This study examines the impacts of debt financing on the firms’ investment decisions by employing the method of the multiple linear regression on the data from 2006-2008 of 60 Chinese real estate listed companies. We obtain three major findings. First, there is a negative relation between debt financing and investment behavior in both firms with low-growth opportunities and high-growth opportunities and that this negative effect is significantly stronger for firms with low-growth opportunities than those with high-growth opportunities. Second, there is a positive relation between debt financing and investment behavior in firms with mid growth opportunities and operating performance. Third, for the state-owned holding companies, there is a positive relation between the scale of investment and debt financing; while a negative relation between investment and debt financing exists in non-state-owned holding companies. The results provide support to agency theories of corporate leverage, and especially the theory that leverage has a disciplining role for firms with low-growth opportunities.

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