Reserve Bank of India

01.07.2020

Banking

RBI Working Paper No. 07/2020: Impact of Leverage on Firms' Investment: Decoding the Indian Experience

MANU/RPRL/0104/2020

The Reserve Bank of India today placed on its website a Working Paper titled "Impact of Leverage on Firms' Investment: Decoding the Indian Experience" under the Reserve Bank of India Working Paper Series*. The paper is authored by Avdhesh Kumar Shukla & Tara Shankar Shaw.

The paper focuses on the relationship between firms' leverage and their investment behavior in India. The empirical results suggest that firm-level leverage could provide early signals about the movements in investment cycle. Furthermore, the paper finds that firm's leverage adversely affects its investment activity in a non-linear manner i.e., firm's leverage at lower level has a positive impact on its investment while at higher level it affects investment negatively. The paper concludes that the initiatives to clean up balance sheets of banks and deleveraging by non-financial corporates should help in revival of the investment cycle. The results are consistent with the agency cost of debt and trade-off theory of capital structure, where firms set target for leverage by balancing costs and benefits of debt.

Tags : Impact Leverage Firms' Investment

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