Companies’ investment determinants: comparison of different panel data estimators

Zelia Serrasqueiro,Paulo Maçãs Nunes,Silvia Mendes

doi:10.4102/sajems.v11i4.283

Zelia Serrasqueiro, Paulo Maçãs Nunes + Show 1 more

Open Access

https://doi.org/10.4102/sajems.v11i4.283

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Abstract

In this study, Aivazian, Ge and Qiu’s (2005) analysis using static panel models is extended to using dynamic panel estimators, considering data for listed Portuguese companies. The results confirm Aivazian et al.’s (2005) conclusion that an ordinary Least Squares (OLS) regression is not the best way to estimate the investment/determinant relationship. Investment decisions are probably dynamic, so the most suitable way to estimate the investment/determinant(s) relationship is using dynamic panel estimators. Alternatively a fixed effect panel model can be used, consistent with a first order autocorrelation. In this way, firstly, it is possible to determine more accurately the positive impact of sales (Neo-classic theory) and cash flow (Free Cash Flow theory) on the investments of listed Portuguese companies. Secondly, the positive effect of growth opportunities (Agency theory) is not overestimated when it seems to be the consequence of a first order autocorrelation. Using dynamic panel estimators permits correct measurement of dynamism in company investment decisions by examining the relationship between investment in the previous and the current periods.

Highlights

Modigliani and Miller (1958) postulated that, provided that there is perfect information and that there are no transaction costs, external and internal finance are perfect substitutes
Estimating the results with a fixed effect panel model consistent with the existence of first order autocorrelation, we found firstly, the parameters measuring the impact of sales and cash flow on investment increased considerably – in the case of sales, the parameter became statistically significant at a 5 per cent level of significance; and, secondly, the parameter measuring the relationship between growth opportunities and investment ceased to be statistically significant
Concerning the magnitude of the estimated parameters, it is clear that the impact of cash flow, sales and debt on investment were greater when we estimated the relationship between investment and its determinants using Arellano and Bond’s (1991) GMM dynamic estimator, compared to using Bruno’s (2005) Least Square Dummy Variable Corrected (LSDVC) dynamic estimator and a fixed effect panel model consistent with the existence of first order autocorrelation

Summary

Introduction

Modigliani and Miller (1958) postulated that, provided that there is perfect information and that there are no transaction costs, external and internal finance are perfect substitutes. This implies that investment decisions are independent of companies’ financial decisions. If markets are characterised by imperfections, investment finance may only be available in capital market with higher costs for companies. This implies that the investment spending of some companies may be constrained by a shortage of internal funds. The level of internal funding could be an important determinant of corporate investment

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