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Other economic analysis

Firms' leverage and investment

In the years leading up to the financial crisis, Danish firms built up high leverage and substantially reduced their investment during the crisis. This article presents an analysis of the relation between the pre-crisis leverage ratios of individual firms and the development in their investment during the crisis. Firms with high leverage ratios reduced their investment more than firms with lower leverage ratios. Although lack of demand rather than build-up of leverage was the primary driver of the contraction in investment, the large build-up of leverage in the years leading up to the financial crisis, to some extent, contributed to the subsequent fall in investment. Thus, a weakly capitalised corporate sector may contribute to higher macroeconomic volatility. The findings of the analysis also indicate that credit constraints did not play any major part in the development in investment during the crisis.