Investment Patterns and Financial Leverage
Open accessAbstract
This study Investigates the influence of the type of Investment opportunities facing a firm on its choice of capital structure.It Is shown that the more discretionary Investment opportunities a firm faces, the lower its financial leverage.Inclusion of other possible determinants of capital structure, such as availability of internal funds, tax effects and risk, while significant, do not affect the importance of discretionary investment.The evidence supports (1) the existence of a moral bazzard problem which inversely relates risky debt and discretionary investment choice, and (2) a desire by most firms to use sources of internal funds prior to entering the capital market.
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Risky firms tend to borrow less, other things equal.
“Risky firms tend to borrow less, other things equal.For example, both Long and Malitz [21] and Williamson [41] found significant negative relationships between unlevered betas and the level of borrowing.”
From The Capital Structure Puzzle (1984) · cites this paper as Long and Malitz [21]
Table 6 reports a negative coefficient for unlevered beta (−0.099, t-statistic 7.62), and the Empirical Results section says its effect on leverage is negative. But that section also reports a significant positive relationship between total risk and leverage, so the broader claim that risky firms generally borrow less is not supported without specifying the risk measure. (LLM, conf=0.89)
Experimental — accuracy not yet measuredFirms holding valuable intangible assets or growth opportunities tend to borrow less than firms holding mostly tangible assets.
“Firms holding valuable intangible assets or growth opportunities tend to borrow less than firms holding mostly tangible assets.”
From The Capital Structure Puzzle (1984) · cites this paper as Long and Malitz [21]
Long and Malitz found a significant negative relationship between rates of investment in advertising and R&D and the level of borrowing, and a significant positive relationship between the rate of capital expenditure in fixed plant and equipment and the level of borrowing.
“For example, Long and Malitz [21] found a significant negative relationship between rates of investment in advertising and research and development (R & D) and the level of borrowing.They also found a significant positive relationship between the rate of capital expenditure (in fixed plant and equipment) and the level of borrowing.”
From The Capital Structure Puzzle (1984) · cites this paper as Long and Malitz [21]
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Research works printed but not linked: 15
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- Malitz, I. 1982b. The optimal set of bond covenants: A theoretical and empirical investigation. Ph.D dissertation, University of Maryland. Long and Maiitz bankruptcy. Journal of Finance 37: 219-226.
- Baxter, N. 1967. Finance 22: Black, F. and M. liabilities. Dasgupta, P. and the speed of DeAngelo, H. and and personal Leverage, risk or ruin and the cost of capital. Journal of 395-4O3.
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- Smith, C. and J. Warner. 1979. On financial contracting: An analysis of bond covenants. Journal of Financial Economics 7: 117-161.
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- Williamson, S. 1981. The moral hazard theory of corporate financial structure: An empirical test. Ph.D. dissertation, Massachusetts Institute of Technology.
Cited by
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MYERS, S. C. (1984) · The Journal of Finance · doi:10.1111/j.1540-6261.1984.tb03646.x · Cited by 7,526 · see citing works
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TITMAN, S., & WESSELS, R. (1988) · The Journal of Finance · doi:10.1111/j.1540-6261.1988.tb02585.x · Cited by 6,112 · see citing works
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- Authors
- Long, M., & Malitz, I.
- Affiliations
- Rutgers, The State University of New Jersey (US)
- Venue
- National Bureau of Economic Research
- Publisher
- National Bureau of Economic Research
- Published
- 1983-06
- Pages
- 325-352
- OpenAlex
- W1481992473
- Cited by
- 295
- References
- 0
- Citations by year
- 2026: 1 · 2025: 2 · 2024: 1 · 2023: 9 · 2022: 7 · 2021: 9 · 2020: 16 · 2019: 9 · 2018: 3 · 2017: 8 · 2016: 13 · 2015: 17 · 2014: 13 · 2013: 9 · 2012: 9
- Type
- report
- Language
- en
- Open access
- green
- doi.org
- Locations
- National Bureau of Economic Research (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- National Bureau of Economic Research (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Social Sciences › Business, Management and Accounting › Accounting › Working Capital and Financial Performance
- Keywords
- capital structure, leverage, investment opportunities, moral hazard, risky debt, internal funds, tax effects, risk, investment patterns
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