st this argument by examining the pattern of abnormal investments for firms with excessive real asset invest- ments defined as those that have higher capital expenditure ratios relative to their benchmark firms in each of the two years immedi- ately preceding the debt issue.14 If issuing debt controls real asset overinvestments we should observe a dramatic decrease in indus- try-adjusted capital expenditure ratio after the offering for these firms. For all other firms

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debt is not expected to impact capital expenditures because these firms are not overinvesting.The results of our tests are presented in Table 3. There are 114 firms that are classified as overinvesting in real assets before the debt offering. For this sub-sample there is a dramatic decline in excess investments after the introduction of leverage. Abnormal capital expenditure of the median firm