The importance of a firm's balance sheet for determining its investment and employment decisions is the central … assumption of macroeconomic models of 'debt deflation' or 'debt overhang.' According to these models, firm investment decisions …, investment, and inventory accumulation to exogenous changes in sales depend on the leverage of the firm. We find that leverage …

We model fixed investment incorporating the inventory decision of the firm. Using Dutch listed nonfinancial firms … during 1985-2000, we find that the inventory stock is negatively associated with fixed investment. The results suggest that … hold the inventory stock as a contingency substitute for the financial source of fixed investment …