The Effect of Financial Leverage on Investment Decisions: The Evidence from Emerging Markets

The paper aims to investigate the effect of financial leverage on companies' investment decisions in the selected emerging countries. To understand the investment/borrowing relationship, in the post-2000 period, when borrowing rates increased throughout the world, we investigated the relationship between investment and borrowing by considering the underinvestment hypothesis of Myers (J Financ Econom. 5: 147--175, 1977). This study covers 15,400 observations in the period 2005--2015 examines firms of developing countries in different economic dynamics. The study results show that leverage has a significant negative effect on investment and that this connection is found reliable and valid with the panel regression and two-stage least squares models. Although the findings differ from country to country, the evidence supports Myers' underinvestment theory that borrowing has a controlling role for companies with low enlargement opportunities in the emerged countries.