Does Leverage Influence Firms' Investment Decisions? The Case of BSE 500 Index Companies

The present paper analyses the impact of leverage on investment for BSE 500 index Indian companies excluding the banking and financial companies. The empirical methodology involves application of random effects and fixed effects models on panel data with 320 cross-sections over a period of 17 years with 5440 observations. We find that Hausman test fixed effects model is appropriate and it has been able to capture significant negative association between investment and leverage for both measures, namely, total leverage and long-term leverage. All the other coefficients except cash flows are significant but the coefficient values are quite low. Therefore, the study applies Wald test wherein all the coefficients are significantly different from zero. Sales, firm size and Tobin's Q have positive whereas firm age has negative association with investment. The association between investment and leverage for low and high growth opportunities firms has been examined using a dummy variable and the results indicate that there is positive association between these variables for high growth companies.