Leverage, liquidity, and investment: the cyclical effects of corporate debt

  1. Gonzálvez, Rubén
  2. Cárdenas, Luis
Journal:
Economic Modelling

ISSN: 0264-9993

Year of publication: 2026

Volume: 156

Type: Article

DOI: 10.1016/J.ECONMOD.2025.107457 GOOGLE SCHOLAR lock_openOpen access editor

More publications in: Economic Modelling

Abstract

How does corporate debt shape firms’ investment behavior across the business cycle? Using firm-level balance sheet data for Spanish companies over 1997–2019, we estimate a flexible panel data model and a doubly robust difference-in-differences design to identify the causal effect of leverage on investment. We find that leverage stimulates investment before 2008 but strongly contracts it during the post-2008 deleveraging period. After 2008, highly indebted firms reduce their investment rate by 1.8 percentage points more than less indebted firms. This contraction is concentrated among small and medium-sized enterprises, with micro firms cutting their investment rate by 6.3 percentage points and firms in construction showing particularly strong declines. In contrast, investment by large firms remains comparatively stable. The results underscore the procyclical nature of corporate debt and suggest the importance of closely monitoring firm leverage and liquidity conditions, particularly for SMEs, during periods of economic expansion and contraction.

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