In this study, the effect of leverage on investment is analyzed by employing panel data methods for the Turkish non-financial firms that are quoted on İstanbul Stock Exchange. For one-way error component models, it is shown that there is a negative impact of leverage on investment for only firms with low Tobin’s Q. These results are in conformity with the previous literature and agency theories of corporate finance stating that leverage has a disciplining role for firms with low growth opportunities. However, when the model is extended to include the time effects in a two-way error component model, the relation between leverage and investment disappears.