Asymmetric Information and Agency Cost of Financial Leverage and Corporate Investments: Evidence from Emerging South-East European Countries

Abstract

In this paper, we investigated the impact of financial leverage on investment decisions on a sample of 811 firms from ten emerging South-Eastern European countries (Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Greece, Romania, North Macedonia, Slovenia, Serbia and Turkey). We apply a panel regression model involving investment ratio as a dependent variable, leverage as independent variable, and control for several firm characteristics that closely determines the corporate investments. The results of the analysis show that leverage is negatively related to investment in the companies in SEE. But only long term debt has a stronger negative impact on investment for firms with low growth opportunities than for firms with high growth opportunities. These findings show supportive evidence of agency theories of corporate leverage, especially with the debt overhang theory, but did not give strong validation that leverage has a disciplining role for firms with low growth opportunities in SEE emerging markets. In addition to leverage, we found that corporate investments in the SEE countries decrease significantly with tangibility and the company size. Corporate investments in the SEE countries increase significantly with cash flow, sales, non-debt tax shield and profitability. Overall, the results slightly defer with those from the research on the case of developed markets.