The effect of debt overhang on investment under financial liberalization: an examination for an emerging market

The present study investigates the debt overhang hypothesis, which posits that increasing debt levels reduce investment, focusing on Chinese private firms over a 20-year period. It examines the role of financial openness and credit market regulations in influencing the relationship between debt overhang and investment in these firms. High leverage discourages investment within the Chinese economy. Furthermore, the study evaluates whether financial openness and credit market regulations mitigate the debt overhang-investment link for private unlisted non-financial firms. The findings reveal no mitigating effect of these factors on the debt overhang-investment relationship. These results remain robust across various modelling approaches.