Overinvestment, leverage and financial system liquiditya challenging approach

  1. Óscar López-de-Foronda
  2. Florencio López-de-Silanes
  3. Félix J. López-Iturriaga
  4. Marcos Santamaría-Mariscal
Revista:
Business Research Quarterly

ISSN: 2340-9444,  2340-9436

Año de publicación: 2019

Volumen: 22

Número: 2

Páginas: 96-104

Tipo: Artículo

DOI: 10.1016/J.BRQ.2018.08.001 DIALNET GOOGLE SCHOLAR lock_openAcceso abierto editor

Otras publicaciones en: Business Research Quarterly

Objetivos de desarrollo sostenible

Resumen

The aim of this paper is to analyse the influence of financial system liquidity and corporate leverage on a firm’s overinvestment. We posit that when external funds are easily available, as in expansionary monetary periods, debt loses its traditional role as a managerial control mechanism. Instead, the supply of systemic liquidity results in corporate leverage exacerbating the problem of overinvestment. Using a sample of over 12,400 companies from 25 OECD countries between 2003 and 2014, our results show a significant and positive relationship between corporate leverage and overinvestment when the liquidity of the financial system is high, confirming the shift in the role played by leverage. At the macroeconomic level, our research raises certain caveats concerning worldwide liquidity injections. At the microeconomic level, our study shows that the disciplinary role of debt might become a false friend when money abounds.

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We acknowledge the Spanish Ministry of Economy and Competitiveness for financial support (Project ECO2017-84864-P and ECO2014-56102-P).

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