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The Role of the European Sovereign Debt Crisis on the Impact of Leverage on Investment Efficiency

Lok, Edwin (2021) The Role of the European Sovereign Debt Crisis on the Impact of Leverage on Investment Efficiency.

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Abstract:This thesis aims to investigate the effect of corporate leverage on the efficiency of investments in relation to the European sovereign debt crisis of 2011 to 2014. Following the theories of debt overhang and the monitoring role of debt, three hypotheses are constructed concerning the effect of leverage on investment efficiency, the effect of the European sovereign debt crisis on investment efficiency and the role of the European sovereign debt crisis on the debt-investment efficiency relationship. To test the hypotheses, two measures of investment efficiency are estimated via optimal investment regression models. The residuals of these regression are transformed such that proxies of total investment efficiency, underinvestment and overinvestment could be defined. Using a sample of European listed firms from seven countries from 2011 to 2019, fixed effects regression models on investment efficiency are estimated. This thesis finds that leverage is related to underinvestment via the problem of debt overhang. In addition, the European sovereign debt crisis caused a reduction in overinvestment for firms with an average level of leverage. However, the positive effect of long-term leverage on the amount of investment inefficiency is more pronounced during the European sovereign debt crisis compared to the post-crisis years.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Business Administration MSc (60644)
Link to this item:https://purl.utwente.nl/essays/86620
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