The Impact of Leverage on Investment Finance Essay

Abstract: This research study aims to scrutinize the impact of leverage on investment of 120 financial firms that are listed on "Karachi Stock Exchange", over the time period of 2008. In this study we have provided a literature review, placing emphasis on quantifying the relationship between leverage and investment of financial firms. Prior research studies in this regard have shown that investment of the firm decreases with increase in leverage. Prior results also indicated that investments of financial firms are positively related to equity and cash flow ratio i.e. any increase or decrease in investment of the firms is directly proportional to the changes in these variables. Moreover, prior research studies have also demonstrated that leverage plays an important role in restraining and controlling the overinvestment made by the financial firms. Our review constructs an integrated theoretical framework from distinct streams of existing literature. This study is guided by distinct disciplines including debt financing, investment management and firm performance. Although literature supplements the negative impact of debt financing on investment, we also opt to measure the same relationship in the context of financial sector of Pakistan. We have identified areas that need significant research work for greater understanding of leverage and investment relationship, and provided recommendations for future research work. Keywords: leverage; Assets; Karachi Stock Exchange; investment; Equity; Cash flow

Introduction:

The importance of debt financing and investment in the development of financial and non-financial sector has been recognized by the financialists and economists for many years now. The knowledge of such key variables is very crucial for the economic development of a country. Firms that rely more on the use of leverage in their capital structure should be aware of debts impact on their investment portfolio. As a result of such significant importance of debt and investment management, they have become an important part of companies' economical development efforts, and due to which there has been a constant increase in the ratio of such research studies universally. The proportion of firms' debts and investments are the key performance indicators of the companies for the shareholders and potential investors. These balance sheet items are considered by the investors before developing their investment portfolio. According to the research work of (AL-Shubiri, 2012; Ma'in and Ismail, 2008), debt ratio negatively affect firm's investment; fixed investments decline or deteriorate in response to growth in leverage ratio. Therefore, it is necessary for all the financial participants whether individuals or firms to assume the relative importance of such economic variables before making investment decisions. Financial sector is the one of the highly regulated sector of the economy. Companies belonging to this sector are heavily loans dependent. Most of their daily transactions are comprised of borrowing and advancing loans and making investments decisions. To optimize their performance and mitigate the associated risk of default, research studies are the tools to offset such risks. This research study aims towards the minimization of financial firms' risk exposure by studying and measuring the relationship between leverage and investment. This study will certainly develop and add value to the existing knowledge of debt financing in relation to investment decisions that are made by the financial listed firms.

Research Questions:

A quantitative research study is always guided by the research questions of the study. It is therefore important to design research questions in such manner as to address the basic purpose of the study (Saunders et al, 2009). Research questions stated below are set to answer the knowledge gaps identified in literature review: Does the leverage affect investment negatively that is made by the financial listed firms? Does the impact of leverage on investment vary in firms with low equity and high equity? Does the impact of leverage on investment vary in firms with low cash flow ratio and high cash flow ratio?

Research Hypotheses:

Keeping in view the identified research gaps in literature, theoretical frame work and most important the research questions of the study, the following set of hypotheses are constructed where only null hypotheses are stated. The alternative hypotheses could be derived in such a way where the relationship between leverage and investment is expected. The following hypotheses are set in order to accomplish the objectives of this study: H1: There is no significant relationship between investment and leverage of the financial listed firms. H2: There is a significant negative relationship between investment and leverage in firms with low Equity. H4: There is a significant negative relationship between investment and leverage in firms with low cash flow ratio.

Objectives of the Study:

The general objective of this research study is to investigate the relationship between leverage and investment in the non-financial sector of Pakistan in the light of empirical evidence while considering the significance of different important variables. Given below are some of the specific objectives of the study: To measure the effect of leverage on investment's decisions of non-financial listed companies in Karachi stock exchange. To measure the effect of debt in the firms with different level of shareholders' equity and cash flows. To understand the importance of leverage and investment decisions in the financial sector of Pakistan.

Contribution of the study:

Keeping in view the above discussion, this study is intended to contribute to the existing knowledge of financial literacy. This piece of research work minimizes the outsized gap of research studies conducted on the topic of leverage and investment especially in Pakistan. Research studies undertaken worldwide, have suggested inverse relationship between leverage and investment. As there is a significant lack of studies on the relationship of leverage and investment in Pakistan, therefore this study is an attempt to overcome the identified research gaps. This research study also serve as a future reference for researchers and academicians on the subject of debt financing management in relation to investment in every business sector

Significance of the study:

As this study is an endeavor to facilitate financial firms, therefore its outcomes will be beneficial to utilize by banks, insurance, leasing and all other financial companies in order to betterly evaluate and analyze the available leverage and investment opportunity while minimizing the associated risk of default arising from these decisions. The findings of this study may also be of much value to the students, teachers and instructors belonging to corporate tax management and financial management, and other corporate strategies when they employ valuable effective learning in their classroom setting particularly in varied concepts related to the use of debt financing in relationship to the firms' investments. As this is a literature based study with preliminary research findings, they may also be helpful to all the academicians working in the area of debt financing and investment management.

Purpose of the study:

The purpose of this study is attached to those research gaps that are left unfilled by other researchers. The available literature on leverage and investment relationship supports the negative relationship between leverage and investment of the firms. Researches in different sectors of the economy support this inverse relationship between leverage and investment. Therefore, there is a need of a research study especially in financial sector that could also take the relationship between leverage and investment under consideration in Pakistan as well. And as the purpose of this study is to fill the existing knowledge gaps in literature on leverage and investment relationship and to confirm whether the same inverse relationship exists in financial sector of Pakistan or not, therefore, the workout of this study will bring awareness among all the people working in financial companies of the world.

SCOPE OF THE STUDY:

The overarching aim of the proposed study is to quantify and measure the relationship between leverage and investment in the financial sector of Pakistan. As this study will incorporate cross sectional datasets of 2008 related to leverage, cash flow, assets and investment from financial listed companies in KSE, therefore, the findings will be only applicable to non-financial sector of Pakistan that is mainly comprised of Textile, Sugar and Cement companies.

LIMITATIONS OF THE STUDY:

This study may suffer from the follow limitations: As this study includes a sample of 120 different non-financial companies, therefore, there are chances that data for some variables of the companies may not be available and as a result sample size will shrink and analysis based on that may not give appropriate results. As the economical conditions of the Pakistan are very volatile, therefore, cross-sectional dataset of 2008 may not record the accurate intended results.

LITERATURE REVIEW:

This research study links distinct dimensions of literature that study the relationships between firm's financial leverage and investment, debt ratio and investment, capital structure and firm performance in different non-financial sectors. In this part, we check the preceding literature and facts in all of these streams of research study. Our research study contributes directly to each of the streams of research discussed below. We establish prior research at a basic level on the relationship between leverage and firm's investment. We then expand past research by delving into the role of Pakistani listed companies in Karachi stock exchange. Our research study devote directly to each of the streams of research argued as under Research studies conducted in the past have shown that leverage has a significantly negative impact on firms' investment. Due to that reason, this research study aims to examine the impact of leverage on firms' investment. The recent research study that has been conducted by AL-Shubiri (2012), determines the impact of the bank and total debt ratio on Jordon listed companies' fixed investment over the period of 2004 to 2009, and suggests a strong negative impact of total debt ratio on fixed investment for Jordon listed companies. Moreover, the bank loan ratio is also found to have a negative impact on firms' fixed investment in Jordon but the impact of bank loan ratio is found to be greater than total debt ratio. He also states that companies having a higher Tobin's Q and a cash flow ratio make a greater amount of investment. The author argued that the restraining effect of the bank loan ratio on overinvestment is greater than that of the impact of total debt ratio on overinvestment. The author doesn't show much clarity while stating the findings and conclusions of study to support his argument. As this study is focused on banking industry that relies more on financial data, therefore it would be of much relevance if the author has used other financial models. The author could have increased the generalisability of the research findings if the sample frame of study would contain non-financial firms. In this regard, Ma'in and Ismail (2008) also examine the impact of debt ratio on investment in Malaysian listed firms during 2000 to 2007 by applying unbalance panel data .Their findings also support the negative effect of the total debt ratio on the firms' investment but observe positive impact of bank loan ratio on the investment made by the Malaysian listed firms. The author shows similarity in research findings with AL-Shubiri (2012) that the firms with higher Tobin's Q and cash flow ratio make huge amount of investment. The author added that the bank loan ratio has a high negative effect on investment of the firms having low-growth opportunities but suggest a very low impact of bank ratio on investment of high-growth companies. Their concluding remarks suggest that firms having higher tobin's q and cash flow ratio, can make good profit out of their loan capital by investment investing it. The study incorporates the use of fixed asset as investment proxy but ignore the importance of other investment proxies such as market to book asset ratio and price-earnings ratio, thereby limiting the generalisability and validity of the study findings. To proceed for more in-depth inspection of the debt financing and firms' investment decisions, a research study that is undertaken by incorporating the data of 60 Chinese real estate listed companies over the period of 2006-2008. The findings of the study has also confirmed the negative impact of the leverage on investment, which is reported significantly stronger for the firms with low-growth opportunities than those with high-growth opportunities but concluded a positive relationship between debt financing and investment in firms with mid growth opportunities. Moreover, the relationship between scale of investment and debt financing was found to be positive for state-owned holding companies while negative for non-state-owned holding companies (Jiming, Chengqin, & ZhaoHua, 2010). The authors ignore the importance of other estimation techniques otherwise they could propose different results if different estimation techniques were put in use like GMM and MLE to confirm the significance of their results. In the Meanwhile, Yuan and Motohashi (2011) analyze the impact of total debt ratios and bank loan ratio on fixed investment of Chinese listed companies in the year 2001-2006 under the influence of general investment theory. They derive similar results by confirming a negative relationship between total debt ratio (bank loan ratio) and fixed investment by the companies listed on Chinese stock market. Furthermore, firms with a higher Tobin's Q and large cash flow ratio make a large amount of investment. Their results support the findings of research studies conducted by Ma'in and Ismail (2008) and Jiming et al. (2010) that the total debt ratio (bank loan ratio) has a strong negative impact on investment of firms having low cash flow and tobins' q ratio. They argue that the total debt ratio works as a factor that controls excessive fixed investment of the firms listed on Chinese stock exchange. They also conclude that the restraining impact of the bank loan ratio on overinvestment is greater than the effect of total debt ratio on overinvestment in Chinese listed firms showing consistency with the research findings of AL-Shubiri (2012). The authors pay no attention towards the use of other debt and investment proxies in order to assure and optimize the validity and generalisability of the research findings while designing theoretical framework of the study. Most of the research studies conducted in different part of the world has provided similar evidence on leverage and investment relationship. In this regard Aivazian, Ge, & Qui (2005) also scrutinize the influence of debt financing on companies' investment decisions by incorporating data of 863 companies from Canadian publicly traded firms between 1982-1999, and derives same result by stating a negative relationship between leverage and investment and that negative impact is found to be weaker for the companies with high-growth opportunities but stronger for the companies with low-growth opportunities. The same and results are also recently provided and supported by (AL-Shubiri, 2012; Jiming et al., 2010). The author could optimize the robustness of the research findings if other important explanatory variables are added to the investment function. While dropping out important variables, the author has left an open door for criticism. Following Ma'in and ismail (2008) research work, Frank & Huyghebaert (2008) conducts a research work in the same year by focusing on the underlying effect of financial leverage on investment while putting an emphasis on the utilization of some of the particular features of private companies to study the negative relationship between debt financing and investment and to know why companies with more debt makes lesser investments. For this purpose data from Belfirst database is incorporated containing a sample of 12,289 private firms from 1996-2005 that are located in Flanders and the most developed region of the Belgium. By using two-stage least square data analysis technique, they conclude slight different result by stating that the companies with higher tobin's q and debt ratio are more likely to underinvest. They derive that the negative relation between leverage and investment at a high debt ratio is significantly lower for the companies that are old. The sample size of the study is big enough to be divided into public firms as well but the authors show negligence towards the generalisability of their research findings. This would have certainly increased the confident of other researchers in their research findings. During the same year, Odit and Chittoo (2008) publish a research paper that primarily focuses on the leverage and investment relationship. They attempt to study the impact of leverage financing on investment levels by employing firm level panel data of 27 companies from the year 1990-2004 listed on Mauritius stock market under the same influence of underinvestment and overinvestment theory which is used by prior research studies. Their results come in line with the conclusions derived by Aivazain et al. (2005) that leverage has a significant negative impact on investment. They added that capital structure plays a vital role in the companies' investment policies. They experience a negative relationship between leverage and investment for low-growth companies and not for high-growth companies i.e. the results of the negative relationship between leverage and investment are not statistically significant for the companies with high-growth opportunities while remain insignificant for the companies with low-growth opportunities. The sample size selected by authors is small enough to claim the robustness of their findings. The authors are not clear enough as to what data analysis technique is used for the analysis of the panel data. The authors could use pooled regression for the analysis of panel data in order to maximize accuracy of the research findings. In the beginning of the year, Ahn, Denis, & Denis (2006) conduct a research study on the same topic who use US Compustat data base containing a sample of 8,674 diversified firms and 24,400 segments from 1982-1997. They conclude that the negative relationship between leverage and investment is significantly greater for segments with high-growth opportunities than that of segments with low-growth opportunities within diversified companies. Moreover, their findings suggest that higher debts put a strong constraint on investment in the segments with high-growth opportunities than in the segments with low-growth opportunities. The authors suggest that the negative relationship between leverage and investment exists only for the firms with high growth opportunities while contradicting the work of (Aivazain et al., 2005; Yuan & Motohashi, 2011). They also explain that debt ratio has a great impact on management decisions regarding investment and argue that diversified firms can prevail over the limitations of debt ratio with the help of distribution of liabilities by corporate managers. The authors could triangulate in terms of applying multiple regression techniques such as a pooled regression could be another robust alternative to cross-sectional regression that would provide distinct results on the leverage and investment relationship in diversified firms. The thirst and curiosity for research on the relationship between leverage and investment continues in Asia as well. In this regard Firth, Lin, & Wong (2008), also examine the relationship between leverage and investment made by the firms listed on Chinese stock market, where corporate debts are mainly supplied by state-owned banks. They employ data from china stock market and Accounting Research Database (CSMAR) which consist of 1200 listed firms from 1991-2004, thereby applying fixed effect models and the investment equation, following Aivazian et al. (2005) to inspect the impact of bank loans on company's investment. Their findings suggest an inverse (negative) relationship between leverage and firm's investment. That negative impact of leverage on investment is found to be weaker for the firms with low-growth opportunities than that of the firms with high-growth opportunities. They also derive a slightly negative relationship between leverage and investment for the firms with higher level of state share holding but conclude a strong relationship between leverage and investment for the firms having low amount of state share holding. The authors provide a very weak explanation of their research findings. They fail to relate their results to the proposed theoretical frame work while showing lack of appropriateness of their research methodology. The increasing demand and dependency on loan capital in the modern economies has created serious economical threats for most of the countries especially under developing countries like Pakistan. In this regard Qureshi and Ali (2010) recently publish a research paper who analyzes the effect of high public debt load on the economy of Pakistan. They collected data from the World Development Indicators 2010 and Pakistan economic survey from 1981-2008, applied the method of ordinary least square (OLS). Their findings suggest that there is a strong negative impact of public debt on the economy of Pakistan and that negative effect of debts on Pakistan's economic development is relatively significant because of the continuous borrowings of the government. They added that this rapid increase in public debts has adversely affected most of the economical sectors of Pakistan. The authors could have betterly explained the growing effect of leverage on economy if other economic exogenous variables are used along Gross domestic product (GDP). The authors could have done a better job if the robustness of findings is tested by other methods like MLE and GMM. The awareness of debt financing is really essential in modern time for every sector of the economy whether financial or non-financial due to the requirement and immense use of leverage in the capital structure .To overcome such challenges; recently Bao (2010) examines the impact of financial leverage on firms' investment listed on Chinese stock market. The data from 1992 to 2009 used in this research study is collected from the financial statements of 1686 companies listed on Chinese stock exchanges i.e. Shenzhen and Shanghai stock exchange. He provides that there is a significant confidence that the relationship between debt financing (leverage) and companies' investment is negative, suggesting similar results like that of (Ahn et al., 2006; Lang et al., 1996) research work. The findings provided by the author might be misleading because financial data is not abnormality free and the use of ordinary least square method may not provide the accurate results. Therefore, it would be of much importance if other methods like GMM and MLE are used to certainly to assure the robustness of their research findings. The need to study leverage and investment relationship is also showed up in India. Due to that reason John and Muthusamy (2011) analyze the impact of financial leverage on investment by Indian pharmaceutical firms listed on Bombay stock market during the year 1998-2009 but conclude slightly different results from prior research studies, stating that there is a positive relationship between leverage and the level of investment and add that this positive effect is found to be stronger for firms which are smaller in size but it has negative impact on medium sized firms and positive effect on large sized companies which is not statistically significant. The sample size used in this study by the authors is small enough to claim generalisability. The authors could have increased their study sample size representing all pharmaceutical companies. Furthermore, Norvaisiene, Stankeviciene, & Krusinskas (2008) examine the impact of loan capital (debt) on investment and growth of Baltic firms using the data of 76 non-financial listed Baltic companies over the period of 2000 to 2006. Their results provide evidence on the effect of overinvestment problem in Latvian companies but states underinvestment problem in Lithuanian and Estonian firms. He added that Baltic companies with high growth opportunities have a significant effect of debt constraints on their investment decisions, whereas there is no effect of debt constraints on investment policy of Baltic companies with low growth opportunities. The authors don't provide sufficient evidence on debt and investment relationship and showed less clarity among their research findings. The authors could have derived more accurate results if other investment variables were used in the model to enhance the generalisability of their research findings. The authors could also triangulate by using multivariant regression model, thereby comparing the results of both method then choosing the one showing more robustness. During the same year Carrascal and Ferrando (2008) also study the effect of financial position on firm's investment decision using a sample of 120000 non-financial companies listed in Belgium, Germany, France, Italy, Netherlands and Spain which is collected from the AMADEUS database. Their findings indicate variability in the investment among European firms and illustrate that companies in Germany have lower effect of debts on investment decisions than that of those Italian and Dutch companies. Moreover, their results have shown that there is a negative relationship between debt and investment but there is a positive impact of cash flow on investment. Since the financial position is proxied by the authors using some ratios, the results might be misleading to claim their generalisability. The author could have emphasized on the inclusion of different other proxy variables such as liquidity, profitability, operating and investment ratios to improve the accuracy of their research findings.

RESEARCH METHODOLOGY

Literature review on leverage and investment relationship has provided me a solid base and given me a clear understanding of leverage and investment management. It has provided us the results and conclusions of all those research studies that are previously conducted on same topic of interest in different countries having distinct financial aspects. On the basis of those prior research studies, I have designed and developed research methodology for this study accordingly. In prior research studies, the debt ratio was found to have a significant effect on fixed investment made by the firms. The impact of debt ratio on fixed investment was checked under different investment proxy variables such as market-to-book ratios of assets, market-to-book ratio of equity and earnings-price ratio in previous studies. Our study focuses on the use of fixed asset as a proxy for fixed investment and to study its relationship with debt ratio. For this purpose we have adopted Ordinary Least Square Estimation method to study the empirical relationship between debt ratio and investment.

Model specification:

Investment i = AŽA± + AŽA²1 (Debt i) +AŽA²2 (Equity i) +AŽA²2 (Cash flow i) + AŽAµi

Where Investment i = Fixed investment (fixed assets) of Company i at time t Debt i = Total debt ratio (total liabilities/total assets of Company i at time t Cash flow i: Cash flow of Company i at time t Equity i: Share holders' equity of company i at time t AŽA± = Intercept of regression line which is the value of Investment when all explanatory variables = 0 AŽA² = Slope of regression line which shows change in Investment for a unit change in explanatory variables AŽAµi = Regression residual The total debt ratio has also been used as a proxy variable for the measurement of financial leverage in preceding studies of AL-Shubiri (2012) and Ma'in and Ismail (2008). Aivazian et al. (2005) and John and Muthusamy (2011) have used total fixed assets as proxy variable for firm's fixed investment. Whereas, the firm growth and profitability is measured by two other proxy variables such as cash flow ratio and Equity as in accord with the research work of Firth et al. (2012) and Firth et al. (2008). The stated model expresses the impact of three independent variables (Leverage, Equity, Cash flow) on one dependent variable (Investment), referring towards the relevance of the study. This study aims to quantify the leverage and investment relationship. For this purpose Independent variable Leverage is proxied by Total debt ratio (Total liabilities/total assets). Equity is also added to investment equation as an independent variable which shows the investment capital of the share holders in the company that is used as a controlling variable to check the varied effect of leverage on investment made by the firms having different amount of invested capital. Cash flow is proxied by cash flow ratio (operating cash flow - capital expenditure/operating cash flow) and added as an independent control variable to investment equation. According to AL-Shubiri (2012) increase in debt ratio has negative impact on investment, and this negative impact exists for the firms having low amount of share holders' equity, whereas firms with higher Cash flow and equity have sufficient internal funds and show more tendency towards large investments. As we can see that firms relying more on leverage, will certainly increase the amount of total liabilities in debt ratio (total liabilities/total assets), thereby increasing the risk exposure of the firm. Such conditions become more severe when the firms have low cash flow and equity, and show more dependency on loan capital.

DATA ANALYSES

In this study, I use data of 2008 of non-financial companies of textile sector's firms listed on Karachi stock exchange.

Correlation between Variables

Year

Index

Fixed_Invest

Debt_ratio

Cashflow_ratio

Equity

2008

Fixed_invest 1 -.201 .511 .401 Debt_ratio -.201 1 -.256 -.221 Cashflow_ratio .511 -.256 1 .315 Equity .401 -.221 .315 1 Table 1 The correlation table given above shows the correlations between all the variables used in this study. We can see clearly that the debt ratio (independent variable) is negatively correlated with the fixed investment (dependent variable) of the firms. The same correlation between fixed investment and debt ratio was also documented by AL-Shubiri (2012) and Ma'in & Ismail (2008) in their research studies. The above results also confirm minimal/low correlation among explanatory variables, indicating absence of multicollinearity problem, assuring the validity of estimation results.

Regression Analysis of Investment equation

Year

Variable

Coefficient(AŽA²)

Standard Error

t-ratio

p-value

Adj R2

2008

Constant (AŽA±) 10.217 .037 27.51 0.00001 0.041 Debt_ratio -1.172 .548 -2.136 0.0120 Investment = 10.217-1.172 (Debt_ratio) Constant (AŽA±) 8.901 0.468 18.98 0.00001 0.174 Debt_ratio -0.690 0.525 -1.317 0.031 Equity 0.402 0.097 4.13 0.00006 Investment = 8.90 - 0.690(Debt_ratio) + 0.402 (Equity) Constant (AŽA±) 8.364 0.439 19.03 0.00001 0.326 Debt_ratio -0.211 0.486 -0.433 0.048 Equity 0.280 0.091 3.071 0.003 Cashflow_ratio 0.441 0.090 4.889 0.00001 Investment = 8.364 - 0.211(Debt_ratio) + 0.280(Equity) + 0.441(Cashflow_ratio) Table 2 Table 2 shows the results of regression analysis of endogenous and exogenous variables. It summarizes the estimation results of the relationship between leverage and investment with the help of basic model of investment equation. The above results of table 2 show that the effect of leverage on fixed investment is a significantly negative at 5% significance level. The leverage ratio continues to show its inverse relationship with fixed investment even with the addition of new variable that is Equity. But one thing is certain that the impact of leverage on investment started to decrease with inclusion of shareholder's equity, indicating that firms with higher equity are affected less than those with low equity, and the same decrease in leverage was also advocated by Ma'in & Ismail (2008). The impact of leverage on investment is also found when another explanatory variable cash flow is added to investment equation but again leverage declines to 0.211 from 0.690 when cash flow variable is added to the model. This shows that those companies who have higher cash flow turnover ratio are less likely to be affected by debts. Since the impact of debt ratio remains on investment even with the inclusion of cash flow ratio therefore, we can conclude that the impact of leverage on investment exists in textile sector of Pakistan.

CONCLUSIONS:

In this study we examine whether the effect of debt on fixed investment exists in textile sector of Pakistan. Then focus our attention on whether the relationship between debt ratio and investment exists when it is proxied by fixed assets of the firm. The key regression estimation results are summarized above. Firstly we find that there is a relationship between debt ratio and investment when it proxied by the fixed assets of the firms in textile sector of Pakistan. We find that the debt ratio does have a negative impact on the investment when it is proxied by the fixed assets of the firms. Secondly, we find that the negative impact of leverage on investment continues even with the inclusion of equity variable, but the adverse effect of leverage decline when equity is added to the investment equation. Thirdly and lastly, when we add cash flow ratio as another control variable to the model, the negative impact of leverage on investment is observed but that negative effect of leverage is declined significantly to a great extent. This decline in the adverse impact of leverage shows that companies with large equity and cash flows are less likely to be affected by the adverse effect of debts. These results are consistent with the recent research work of AL-Shubiri (2012) as well as Yuan and Motohashi (2011). The results of our analysis suggest that in textile sector of Pakistan, the debt ratio works as a factor that restrains excessive fixed investment by the companies. The most important finding in our analysis, we found that impact of debt ratio on fixed investment when it is proxied by Fixed assets of firms is not as strong as indicated in prior research studies. Therefore, it is necessary as an important recommendation for future researches to use other relevant proxies for fixed investment and use of other explanatory variables such as Tobin's q and price-earnings ratio etc as proxies for companies' performance in order to maximize the validity and generalisability of present research findings. Based upon the above mentioned findings, we suggest that the investors and all business policy makers should consider debt ratios and financial leverages while assessing the usefulness of investment decisions. Therefore, we suggest that the relationship between debt ratio and fixed investment should be analyzed in different sectors of Pakistan with the use of different other relevant investment proxies.

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