Investment Decisions Of Firms Research Articles

Does too much liquidity generate instability?

Corporate demand for cash is related to a number of firm-specific characteristics, like the presence of transaction costs, information asymmetry in credit markets, uncertainty and risk aversion. The purpose of this paper is to build a dynamic model that describes the potential chaotic effects of the accumulation of cash by firms over a prolonged period of time. By exploring the theoretical connections between firm financial policies and investment decisions, we show that too much liquidity might generate economic instability. When firm increases the share of cash devoted to risky investment, and reduces the share of cash distributed to shareholders as dividends, the fixed point of the system changes from being stable to being unstable. Moreover, the impact of such a policy on the stability of the system is larger the greater the investment risk. The chaotic behavior is mainly observable in the dynamics of cash, which in turn may affect all investment decisions.

Firm investment decisions for information security under a fuzzy environment: a game-theoretic approach

Purpose This paper aims to examine optimal decisions for information security investments for a firm in a fuzzy environment. Under both sequential and simultaneous attack scenarios, optimal investment of firm, optimal efforts of attackers and their economic utilities are determined. Design/methodology/approach Throughout the analysis, a single firm and two attackers for a “firm as a leader” in a sequential game setting and “firm versus attackers” in a simultaneous game setting are considered. While the firm makes investments to secure its information assets, the attackers spend their efforts to launch breaches. Findings It is observed that the firm needs to invest more when it announces its security investment decisions ahead of attacks. In contrast, the firm can invest relatively less when all agents are unaware of each other’s choices in advance. Further, the study reveals that attackers need to exert higher effort when no agent enjoys the privilege of being a leader. Research limitations/implications In a novel approach, inherent system vulnerability of the firm, financial benefit of attackers from the breach and monetary loss suffered by the firm are considered, as fuzzy variables in the well-recognized Gordon – Loeb breach function, with the help of fuzzy expectation operator. Practical implications This study reports that the optimal breach effort exerted by each attacker is proportional to its obtained economic benefit for both sequential and simultaneous attack scenarios. A set of numerical experiments and sensitivity analyzes complement the analytical modeling. Originality/value In a novel approach, inherent system vulnerability of the firm, financial benefit of attackers from the breach and monetary loss suffered by the firm are considered, as fuzzy variables in the well-recognized Gordon – Loeb breach function, with the help of fuzzy expectation operator.

Wealth, Credit Constraints and Small Firms’ Investment: Evidence from Brazil

We explore the effect of wealth on occupational choice to find out whether small firms in Brazil face credit constraint and how occupational choice relates to investments. Using an instrumental variable approach, we find evidence that occupational choice is, in fact, constrained by wealth and this constraint is related to investment decisions. Our main results show that the probability of investment increases by 0.45 when the individual is an employer, controlling by entrepreneurs characteristics and sector, suggesting that the constraints at the credit market may affect investment decisions of small firms in Brazil. The effect of being an employer on credit access is about 0.320, which supports the idea that employers have more access to credit than the self-employed.

Revisiting the Relationship Between Price Regulation and Pharmaceutical R&D Investment.

BackgroundA trade-off exists between affordability of pharmaceutical products today and incentives for firms to provide new and better drugs in the future; an activity that prior studies suggest correlates with profitability, which in turn depends on price regulation.ObjectiveIn this paper we re-examined the relationship between price regulation and pharmaceutical research and development (R&D) intensity, and explored the role of profitability and cash flow in mediating this relation using the latest available data from 2000 to 2017 for the 10 most innovative pharmaceutical companies.MethodsFollowing a framework similar to a previous study, we exploited stylized facts about sales volumes in Europe and USA, which give rise to variation in exposure to price regulation. Using ordinary least squares fixed effects models, we assess whether price regulation is related to R&D investment through cash flow effects and profitability.ResultsWhile exposure to price regulation (measured by relative market share in EU/USA) is related negatively to R&D intensity, and this result is driven by price regulation being negatively related to cash flow and profitability, the results were not significant when firm fixed effects were added to the regression models. Modeling firm dynamics showed that cash flow and profitability of European- and US-based firms responded differently to exposure to price regulation. Thus, firm specific effects play an important role in explaining the negative relationship between price regulation and R&D intensity. These results were robust to the inclusion of different time-varying firm level variables.ConclusionThe findings suggest that investment decisions of firms are most likely driven by long-run inter-firm differences, and that firm effects strongly determine firm strategies in terms of R&D investment.Electronic supplementary materialThe online version of this article (10.1007/s40258-020-00601-9) contains supplementary material, which is available to authorized users.

The influence of uncertainties on leverage and investment decisions of non-financial firms in Indonesia

This study aims to analyse the effect of each uncertainty (firm-specific, market, capital asset pricing model (CAPM)-based, and economic policy uncertainty) on the leverage and investment decisions of non-financial companies in Indonesia. The variables used in this study are leverage, investment, firm-specific uncertainty, market uncertainty, CAPM-based uncertainty, economic policy uncertainty, sales growth, cash flow, Tobin’s Q, and firm size. Researchers used panel data on 224 non-financial companies listed on the Indonesia Stock Exchange from 2009–2018 with variable related data for at least three consecutive years. This research uses the least-squares research method. The results indicate that the four variables used in this study have a significant influence, in groups of variables, on leverage and investment decisions in each non-financial sector, particularly the manufacturing sector, and will remain constant if the four uncertainties are combined in the same situation.

IDENTIFICATION OF LINEAR REGRESSIONS WITH ERRORS IN ALL VARIABLES

This paper analyzes the classical linear regression model with measurement errors in all the variables. First, we provide necessary and sufficient conditions for identification of the coefficients. We show that the coefficients are not identified if and only if an independent normally distributed linear combination of regressors can be transferred from the regressors to the errors. Second, we introduce a new estimator for the coefficients using a continuum of moments that are based on second derivatives of the log characteristic function of the observables. In Monte Carlo simulations, the estimator performs well and is robust to the amount of measurement error and number of mismeasured regressors. In an application to firm investment decisions, the estimates are similar to those produced by a generalized method of moments estimator based on third to fifth moments.

Sovereign debt exposure and the bank lending channel: Impact on credit supply and the real economy

In the context of the European crisis, we show that the security portfolio of banks plays an important role in the propagation of financial shocks across countries. Using Italian loan-level data, we show that the shock to the banks' sovereign portfolio caused by the 2010 Greek bailout was passed on to Italian firms through a credit contraction. This was particularly the case for banks with a lower capital and less stable funding. The contraction in credit was similar for both large and small firms, but it only negatively affected the investment and employment decisions of small firms.

CEO & CFO Education and R&D Investment in Indonesia

This study examines how the research and development (R&D) investments of listed companies in Indonesia are influenced by the educational characteristics of their CEOs and CFOs. This study uses 368 observations from 150 listed companies on the Indonesian Stock Exchange for the period 2010 to 2015. We find that CEOs with higher educational levels invest more in research and development. This is consistent with more education instilling a longer-term perspective on corporate managers. We also find that CFOs with accounting certifications invest less in R&D, consistent with the risk-adverse nature of the accounting profession. For companies and shareholders, our findings indicate the need for a greater understanding of the factors associated with R&D investments in Indonesia and other developing markets. Particularly, factors related to the background experience of CEOs and other executives, whose characteristics can have a real impact on the R&D investment decisions of firms. Our results show that the education of CEOs and CFOs is associated with their investment decisions in research and development. Thus, different education backgrounds create a bias for or against R&D investment in Indonesian firms.

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.

FACTORS AFFECTING INVESTMENT DECISIONS AMONG LISTED FIRMS IN THE NAIROBI SECURITIES EXCHANGE

The importance of investment decision-making cannot be overstated since many of the factors that result in a firm’s success or failure are directly tied to the choices of decisions made. When wrong investment decisions are made, they are not easily reversible and if the firm persists or reverses them they may lead to bigger losses. It is for this reason that this research sought to investigate factors affecting investment decisions among listed firms in the Nairobi Securities Exchange. The study focused on the following factors: financial market information, investment risk, investor’s financial knowledge, and firms’ profitability to establish whether they influence investment decisions. The study employed a descriptive survey design and targeted 178 finance managers of the 67 firms listed on the NSE. Stratified and purposive sampling techniques were adopted in this study and a questionnaire was used to collect data. The researcher employed descriptive and inferential statistics to analyze data collected from the study. The results were analyzed and presented using tables. Based on the results, the researcher concludes that the four independent variables; financial market information, investment risk, firms’ profitability and investor’s financial knowledgesignificantly influence investment decisions of firms listed on the NSE.

The real effect of mandatory disclosure in Japanese firms

This study replicates the effects of mandatory segment disclosures on corporate real investment decisions in a Japanese setting. We focus on the mandatory segment disclosure changes implemented in Japan since 2011 and find that unlike the case with US firms, these disclosures have not affected the corporate investment decisions of large Japanese firms. Mandatory segment disclosures were introduced in Japan in 2011, coinciding with Great East Japan Earthquake, explaining the subsequent increase in investments. Therefore, we estimate that, based on the learning model, Japanese mandatory disclosures might be confounded by the revelatory price efficiency crowding-out effects that led to a decrease in the corporate investment of US firms.

Financial constraints and workforce environment: An international investigation

AbstractWe examine the association between financial constraints and workforce environment. Using data from 43 countries for the period 2002–2017, we find that financially constrained firms tend to have poor workforce environments. In addition, we investigate the impact of country‐level employment protection legislation (EPL) on this association. It is evident from our results that the investment decisions of firms under financial constraints are conditional on the strictness of EPL. Our findings provide important practical implications for international policy makers, in particular, about the significance of EPL for workforce environments. Our study also contributes to the scant literature on the determinants of workforce environment and provides robust international evidence on the detrimental effects of financial constraints on workforce environments.

Business Group Dominance and Capital Allocation Externalities: Evidence from Korean Chaebols

This study investigates how dominant business groups affect investment decisions of other standalone firms in the economy. Using intra-group equity transactions within the top 40 largest business groups in Korea, this study finds that high levels of internal capital allocation within the groups exert a negative influence on investments of standalone firms that require external capital. Due to financial market imperfections associated with low investor protections, business groups prefer internal investment rather than outside investment. However, when internal capital allocation is prevalent in the economy, lots of capital is trapped inside business groups and available capital in external markets becomes scarce. Standalone firms outside business groups have difficulties raising external finance and thus reduce investment. The negative influence on investments of business group dominance is particularly pronounced for private standalone firms and the firms that hold fewer tangible assets. Findings in this study suggest a negative externality that business groups impose on other standalone firms: the bias toward internal investment makes it harder for good projects outside business groups to obtain capital.

The impact of macroeconomic condition on investment-cash flow sensitivity of Indian firms

PurposeThe purpose of this paper is to investigate the impact of the macroeconomic condition on investment-cash flow sensitivity (ICFS) of Indian firms and examine whether the effect of macroeconomic condition on ICFS depends on the size and group affiliation of the firm.Design/methodology/approachAn empirical investigation is conducted using a dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique.FindingsEmpirical findings postulate that the availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are internally as well as externally financially constrained. This study finds that good economic condition (period of high GDP growth rate) reduces the ICFS, although this effect is stronger for small-sized and standalone firms than the large-sized and business group affiliated firms. The authors find that macroeconomic condition has a positive and significant effect on investment decisions.Research limitations/implicationsThis study has considered only the non-financial sector. The future research could explore the effect of macroeconomic condition on ICFS might be affected by firm other characteristics such as firm age and firm capital structure.Social implicationsThe government should provide loan on the low rate to the small-sized firms and standalone firms because it is very difficult for these firms to finance their investment during the bad economic condition (period of low high GDP growth rate).Originality/valueThis study contributes to the existing literature by analyzing the impact of the macroeconomic condition on ICFS as well as investment decisions of the Indian manufacturing firms, which is an unexplored issue from an emerging market perspective. To the best of my knowledge, this is a first-ever study which explores the effect of macroeconomic condition on investment decisions with respect to business group affiliation and firm size.

The moderating effect of environmental uncertainty on executive shareholding and firms' investment decisions

This study investigates the relationship between executive shareholding and firm investment decisions (FID) under circumstances of environmental uncertainty (EU). We posit that the implementation of equity incentive plans for executives could influence their decision-making behaviour towards underinvestment or overinvestment. Using data from a sample of 400 listed Chinese firms from 2009-2012, we find that the relationship between executive shareholding (ES) and FID is inverted U-shaped. Further, we find a negative relationship between environmental uncertainty and FID, but no evidence of a moderating effect of environmental uncertainty on the association between executive shareholding and investment decisions. We, therefore, outline the implications of these findings and advance a theory based on these findings.

Governance Structure, Technical Change and Industry Competition

We develop a model to study the impact of corporate governance on firm investment decisions and industry competition. In the model, governance structure affects the distribution of shares among short- and long-term oriented investors, the robustness of the management regarding possible stockholder interference, and the managerial remuneration scheme. A bargaining process between firm's stakeholders determines the optimal allocation of financial resources between real investments in R&D and financial investments in shares buybacks. We characterize the relation between corporate governance and firm's optimal investment strategy and we study how different covernance structures shape technical progress and the degree of competition over the industrial life cycle. Numerical simulations of a calibrated set-up of the model show that pooling together industries characterized by heterogeneous governance structures generate the well-documented inverted-U shaped relation between competition and innovation.

Impact from Productivity and State-ownership of Chinese Agricultural Firms on ODI Decisions

Chinese agricultural outward direct investment has grown rapidly over the last decades. Neo-classical foreign direct investment theories can explain the reasons in motivation perspective reasons for the rapid growth, but cannot explain what types of agricultural firms would be most likely to undertake outward direct investment to together make the rapid growth. We use a Chinese agricultural firm level dataset matched from Chinese industrial enterprises database and Chinese outward direct investment enterprises database to empirically examine the relationship between firm heterogeneity and outward direct investment decisions. We find the estimation results support the Helpman-Melitz-Yeaple hypothesis that as the first firm heterogeneity the total factor productivity has a positive influence on the probability that a firm will undertake outward direct investment, which is in accordance with the past related research especially the recent theoretical research progress of international direct investment. In contrast, we find that as the second firm heterogeneity the state ownership has a negative influence on the probability that a firm will undertake outward direct investment, which is not in accordance with the past research on Chinese overall outward direct investment and could be explained by the domestic support obligations of the state-owned agricultural firms in China. Furthermore, we implement robust estimation and the results shows a significant robustness. Our research shows that firm heterogeneity dose matter and it is important to take this into account in analyzing Chinese agricultural firms' outward direct investment decisions.

Bidding for outsourcing contracts with capacity investments and cost asymmetry

In this article, we consider a service supply chain where two vendor firms compete to win an information technology outsourcing contract from a client firm, which faces uncertain demand. The vendors’ variable operations costs are private information. The vendors also serve an external market with uncertain demand. After the award of the contract through bidding competition, vendors invest in capacity to meet their service requirements. We derive the optimal sourcing strategy for the client firm and the capacity investment decisions of the vendor firms. We characterise a threshold policy on the client’s outsourced requirements with respect to demand variability. We also observe that as the vendors’ mean cost increases, the requirements outsourced by the client firm decrease. In addition, we observe a threshold policy on the client’s outsourced requirements with respect to cost variability through numerical studies.

Climate Disasters And Financial Fundamentals

I propose a rare disaster model of an economy where disasters are driven by CO2 levels that are determined by inputs of carbons from the firms of the economy. The probability and intensity of disaster are determined in part by the level of CO2 in the environment. In turn, disasters affect the budgets, the labor allocations and investment decisions of households; the production and investment decisions of firms; and, monetary policy. Prices are determined in equilibrium. From this model, Six propositions are developed relating carbon dioxide levels and climatic economic damages to the financial variables: the risk free rate, the price dividend ratio, and the risk premium. The six propositions are then tested empirically using a unique data set for the United States over the period from March 1958 to December 2018. The data is found to support the six propositions. In general, carbon use, as proxied by the carbon dioxide level, lowers the risk free rate and price dividend ratio, while raising the risk premium. Climatic economic damages raise the risk free rate, while lowering the price dividend ratio and risk premium. However, if the probability of climatic disaster rises sufficiently, these relationships can change. I then briefly discuss some implications of these results.

GDP competition and corporate investment: Evidence from China

AbstractThis study examines whether and how macroeconomic performance competition is related to investment at firm level. We use GDP competition as a proxy of dynamic macroeconomic conditions. We find that the effect of GDP competition on firm investments is significantly positive. We also find that GDP competition destroys investment efficiency significantly, especially by increasing overinvestment. Further tests show that GDP competition is more likely to affect the investment decisions of firms controlled by governments and firms located in regions with low marketization. In addition, our analyses reveal that the provincial officials facing competitive pressure are more likely to be promoted if firm investments accelerate. We use alternative proxies to measure GDP competition and find similar results that support our inference. Our findings support the notion that GDP competition of governments distorts investment behaviour. The present paper also elucidates investment problems and dilemmas faced by emerging economies.