Empirical analysis of debt maturity, cash holdings and firm investment in developing economies

This study investigates the potential simultaneous relationships among leverage, debt maturity and cash holdings and how these jointly affect financial policy and firms' investment activities in developing countries of Thailand, Indonesia and Singapore during the period 2006-2015. Using the two-step system GMM estimator, our results show that high-growth firms not only shorten debt maturity to reduce the underinvestment incentive, but also decrease leverage to reduce liquidity risk. We find evidence that the level of cash holdings is a key determinant of leverage in all countries and that debt policy and growth opportunities affect the investment decision of firms in Thailand and Singapore whereas cash policy is more important in Indonesia. These findings have significant implications for investment decisions in these economies.