A Longitudinal Study of Sales-Based Investment and Leverage Decisions

Abstract

The paper develops a system-based approach to investigate the dynamic adjustment of debt structure and investment policies in a context of risky sales. Empirical results were obtained through a panel data set of US DJ-IA firms/constituents index firms with different sectors. The analysis supports that environmental change does not affect equally the different industry since operating leverage differs among industries and so the sensitivity to sales variance. Including adjusted-specific variance, we find that there is no monotonic relation between leverage, sales and investment. The firm may choose a low debt level in response to high sales variance but high leverage to attenuate the negative relation between sales variance and current level of investment. We further find that while the overall effect of debt maturity on leverage is unaffected by the level of growth opportunities, the shorter the maturity of debt is the smaller the direct effect of sales variance on investment.