ELSEVIER Journal of Frnmcial Economics 40 (I 996) 3 29 ECDNOMICS Leverage, investmcmt, and firm growth

We show that there is a negative relation between leverage and future growth at the firm Ievel and. for diversified firms. at the business segment level. This negative reiation 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. Therefete: leverage does not reduce growvth for firms known CO have good investment opportunities, but is negatively related to growth for firms whose growth opportunities are either not recognized by the capital markets or are not sufficiently valuable to overcome the effects of their debt overhang