LEVERAGE, INVESTMENT, AND FIRM GROWTH

We show that there is a negative relation between leverage and future growth at the firm level and, for diversified firms, at the business s egment level. This negative relation between leverage and growth holds for firms with low Tobin's q ratio, but not for high-q firms or firms in high-q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities, but is negatively r elated to growth for firms whose growth opportunities are either not r ecognized by the capital markets or are not sufficiently valuable to o vercome the effects of their debt overhang.