Corporate debt and investment: a firm level analysis for stressed euro area countries

This paper investigates the link between corporate debt and investment for a group of fi ve peripheral euro area countries. Using firm-level data from 2005-2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and signi ficant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensifi ed and fi rms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when pro fitability is low. JEL Classification: E22, F34, G31, G32