The influence of deleveraging the excessive debt firms on investment efficiency

Abstract

Under China's deleveraging policy scenario, this study analyzes the deleveraging effect of excessive leverage firms on investment efficiency and the influence of arbitrage risk on the deleveraging effect. The results show that deleverage lowers over-investment and, to some extent, alleviates under-investment. Deleverage can further bolster corporate performance while boosting investment efficiency. In addition, arbitrage risk in the capital market negatively moderates the impact of deleveraging on investment efficiency, specifically through the transaction cost mechanism. Arbitrage risk weakens the deleveraging effect on investment efficiency mainly through managerial catering to short-term investor sentiment. This study provides capital structure literature with new evidence by examining whether deleveraging to the firms’ expected capital structure influences investment efficiency. We also provide evidence that capital markets moderate the deleveraging effect by arbitrage risk.