Research on the Impact of Financial Leverage on Corporate Investment Decisions

Abstract

Financial leverage is a crucial concept in corporate financial decision-making and has a significant impact on investment decisions. This research seeks to examine the complex impact of financial leverage on corporate decision-making. Guided by Modigliani-Miller's tax-adjusted model and trade-off theory framework, the author specifically examines the theoretical basis and mechanism of financial leverage, its impact on investment decisions of enterprises of different scales, and suggestions for optimizing the impact of financial leverage on corporate investment decisions. The analysis shows that financial leverage can reduce capital costs through the tax shield effect and prompt enterprises to expand investment in the short term. Excessive financial leverage, however, heightens the danger of bankruptcy, thus resulting in a decrease in firms' return on investment. Leverage decisions should be in a dynamic balance between returns and risks, and enterprises should reduce the debt repayment pressure of financial leverage through diversified financing channels and maturity matching.