Financial Revenues, Financial Leverage, Debt Maturity, Uncertainty and the Underinvestment Problem

The underinvestment problem has become prominent among non-financial firms in the US over the previous two decades. This study investigates whether financial revenues have contributed to the underinvestment issue. Additionally, we examine whether financial leverage, debt maturity and uncertainty alter the relationship between financial revenues and underinvestment. Using a panel of firm-level data of US non-financial firms from 1999 to 2018, we estimate the cumulant estimator to identify the relationships. Our findings show that financial revenues significantly increase the underinvestment problem. However, financial leverage and debt maturity do not play important roles in the effect of financial revenues on underinvestment. In contrast, uncertainty assists financial revenues in increasing the underinvestment problem, especially for highly uncertain firms. Our results are robust to alternative investment opportunities and uncertainty proxies, alternative estimation methods, and an alternative economic model.