The impact of debt financing on firm investment behavior: Evidence from China

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.