Overinvestment, leverage and financial system liquidity: A challenging approach

Artikel

The aim of this paper is to analyse the influence of financial system liquidity and corporate leverage on a firm's overinvestment. We posit that when external funds are easily available, as in expansionary monetary periods, debt loses its traditional role as a managerial control mechanism. Instead, the supply of systemic liquidity results in corporate leverage exacerbating the problem of overinvestment. Using a sample of over 12,400 companies from 25 OECD countries between 2003 and 2014, our results show a significant and positive relationship between corporate leverage and overinvestment when the liquidity of the financial system is high, confirming the shift in the role played by leverage. At the macroeconomic level, our research raises certain caveats concerning worldwide liquidity injections. At the microeconomic level, our study shows that the disciplinary role of debt might become a false friend when money abounds.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: BRQ Business Research Quarterly ; ISSN: 2340-9436 ; Volume: 22 ; Year: 2019 ; Issue: 2 ; Pages: 96-104 ; Barcelona: Elsevier España

Classification and Topics

• Classification: Management ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: Debt ; Investment ; Leverage ; Liquidity ; Overinvestment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): López-de-Foronda, Óscar ; López-de-Silanes, Florencio ; López Iturriaga, Felix J. ; Santamaría-Mariscal, Marcos
• Event: Veröffentlichung
• (who): Elsevier España
• (where): Barcelona
• (when): 2019

Further information

• DOI: doi:10.1016/j.brq.2018.08.001
• Handle: http://hdl.handle.net/10419/261853
• Last update: 10.03.2025, 11:45 AM CET