Investment Patterns and Financial Leverage
Michael S. Long, Ileen B. Malitz
NBER Working Paper No. 1145
This study Investigates the influence of the type of investment opportunities facing a firm on its choice of capital structure. It is shown that the more discretionary investment opportunities a firm faces,the lower its financial leverage. Inclusion of other possible determinants of capital structure, such as availability of internal funds, tax effects and risk, while significant, do not affect the importance of discretionary investment. The evidence supports (1) the existence of a moral bazzard problem which inversely relates risky debt and discretionary investment choice, and (2) a desire by most firms to use sources of internal funds prior to entering the capital market.
Published: Long, Michael S. and Ileen B. Malitz. "Investment Patterns and Financial Leverage." Corporate Capital Structures in the United States, edited by Benjamin M. Friedman. Chicago: Univ. of Chicago Press, (1985), pp. 353-37 7.