Capital structure and growth

This article investigates the dependence between the investment and the financing decision from an empirical point of view. Theoretically, this dependence is a central and contentious issue in finance, with opinions varying between the irrelevance hypothesis and Myers' pecking order theory, which allows for leverage induced obstacles to finance positive NPV projects. The analysis is based on two databases describing the corporate sectors in two smaller European countries, Norway and The Netherlands, over a period of almost 20 years. The analysis distinguishes between short term debt and the more financially chosen long term debt as well as between levels of growth that can and cannot be financed internally. Thus, a more detailed insight into the effects of growth on leverage is obtained, while facilitating the use of the results in an operational and decision oriented context.