Impact of the Debt Ratio on Firm Investment: Evidence from Malaysian listed firms

This paper examines the impact of the debt ratio on firm investment. It is aimed to provide additional empirical evidence based on the original paper by Yuan and Motohashi (2008). The Malaysian firm-level data for the period between 2000 and 2007 are used. This paper has extended the previous literatures by using unbalanced panel data methodology. The findings indicate that: first, the total debt ratio shows a negative impact on fixed investment by firms but total bank loan ratio shows a positive impact on fixed investment. It implies that the effect of debt on investment exists for Malaysian listed firms although the impact at low significance level. Second, the firms with higher Tobin's Q and larger cash flow make larger amounts of investment. Third, the bank loan ratio has a negative impact on investment by low-growth firms than by high-growth firms. These results also depict that the bank loan ratio works as a factor that restrains overinvestment by firms. This impact suggests that banks which are large creditors of listed firms in Malaysia have supervised the investment activities of firms more strongly than other creditors.