Abstract

This study provides evidence on the effect of financial leverage on investment decisions of Nigerian firms using data from non-financial firms listed in Nigeria Stock Exchange. This evidence was established using dynamic panel data method. Specifically, we employed system generalized method of moments (SGMM) in order to address the issue of individual firm heterogeneity and endogeneity problems inherent in the relationship between financial leverage and firm investment. The results show that financial leverage is negatively related to the level of firm investment. This outcome is based on the idea that lack of free liquid funds results to underinvestment problem, which is based on the view that internal and external capital is not perfect substitutes. In view of this, our dynamic panel results provide strong supports for agency theory of financial leverage.