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The impact of corporate debt on long term investment and firm performance

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Prior research indicates a linkage between debt, research and development (R&D) and physical investment, and that the relationship varies depending on the type of firm (science versus non–science). Leverage also plays a multidimensional role in corporate performance and growth. The relationship between financial leverage and R&D expenditure is analysed using a sample of large United States (US) manufacturing firms. Then, the impact of leverage on R&D expenditure is studied using corporate performance drivers as intermediate variables. The results indicate that there is a strong negative relationship between the degree of financial leverage and the level of R&D expenditure that firms undertake. The negative relationship is robust to changes in model specifications and sample periods. More importantly, the results show that it is higher leverage that leads to lower R&D expense rather than R&D causing variations in future leverage. In addition, the results indicate that higher leverage adversely influences future investment in R&D which may in turn lead to negative impact on long term operating performance and future growth opportunities.
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Document Type: Research Article

Affiliations: 1: Willamette University, Atkinson Graduate School of Management, 900 State Street, Salem, Oregon 97301, USA 2: University of Nevada – Reno, College of Business and Administration, Managerial Sciences Department, MS 028, Reno, NV 89557, USA

Publication date: 2005-05-10

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