Abstract
Based on a sample of 182 Portuguese fitness SMEs we study the investment determinants of fitness SMEs in Portugal. The multiple empirical evidence obtained in this study lets us conclude that the main explanatory theories of firm investment cannot be considered mutually exclusive in explaining the investment of Portuguese fitness SMEs, since: 1) they adjust investment as a function of sales, corroborating the assumptions of Neoclassical theory; 2) cash flow is an important financial resource for investment, corroborating the assumptions of Free Cash Flow theory; and 3) external finance, namely debt, is a restrictive determinant of investment, which corroborates the assumptions of Agency theory. Besides these results, we find that growth opportunities and government subsidies are positive determinants of investment in Portuguese fitness SMEs, and the financial crisis of 2008 has a negative influence on investment in Portuguese fitness SMEs. The financial crisis of 2008 also means greater relative importance of cash flow and government subsidies for increased investment, and debt for diminished investment, in fitness SMEs.
Highlights
Various theories have attempted to explain firms’ investment decisions
The paper contributes to the literature by showing that the main explanatory theories of firm investment are not necessarily mutually exclusive in explaining the investment decisions of small and young service SMEs, fitness SMEs, because: 1) adjustment of investment is found to be a function of sales, corroborating the assumptions of Neoclassical theory; 2) cash flow is relevant for increased investment, agreeing with the assumptions of Free Cash Flow theory; and 3) debt is a restrictive determinant of investment, revealing the importance of problems of information asymmetry in relationships between owners/managers and creditors, which corroborates the assumptions of Agency theory
The paper contributes to the literature showing that Neoclassical theory is relevant in explaining the investment decisions of small, young service SMEs, which reveals that small size and young age do not always contribute to firms failing to adjust investment as a function of sales
Summary
Various theories have attempted to explain firms’ investment decisions. In this domain, Neoclassical, Free Cash Flow and Agency theories stand out. According to Free Cash Flow theory, internal finance, and cash flow, is especially relevant in explaining firm investment, with that importance increasing as firms’ access to credit is restricted, as a consequence of the information asymmetry implicit in relationships formed between owners/ managers and creditors. According to Agency theory, the problems of information asymmetry implicit in relationships between owners/managers and creditors can affect firm investment (Jensen, Meckling 1976). According to Jensen and Meckling (1976), owners/ managers can be attracted to investing in high-risk projects which increase the likelihood of firm bankruptcy. Considering the problems of information asymmetry between owners/managers and creditors, according to Agency theory, a negative relationship can be expected between debt and firm investment
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