Financial Flexibility and Investment Decisons: Evidence from Low-Leverage Firms

We test the hypotheses that, in presence of financial constraints, a low leverage policy directed at maintaining financial flexibility can affect company investment. Low leverage is defined according to deviations from target which are estimated via GMS-SYS. Our analysis reveals that, following a period of low leverage, firms are able to make significantly more capital expenditures and increase abnormal investment. The new investments are financed through new issues of debt that take companies closer to their target leverage....