When leverage matters

: investment in Portugal

Abstract

Debt and investment are two fundamental topics in the corporate world. This research investigates the relationship of these two concepts in Portuguese firms over the time window of 2011 and 2022 using a fixed-effect panel threshold model. Studying 6,857 firms, the results suggest that the sensitivity between leverage and investment decreases as firms indebt themselves more. In this scenario, firms are often highly constrained and already operating at minimal investment levels, leaving little room for further reductions in investment. The results across industries and firm sizes are also presented, reaffirming the non-linear relationship and emphasising the primary usage of internal funds to invest, aligned with the pecking order theory. Surprisingly, the relationship between leverage and investment is positive at the 90th percentile of the investment distribution, which might suggest that Portuguese firms often use leverage to finance working capital, daily operations or to benefit from tax shields rather than invest in long-term projects.

Date of Award	3 Feb 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)