Financial Leverage, Firm Growth: The Role of Leverage in Relation to Firm Value. A new theory suggests that the relationship between firm value and firm growth is influenced by financial leverage. The relationship between firm value and company value was explored using an experimental firm model. Using financial leverage, researchers simulated a large number of business cycles with randomly sampled firms. The results showed that firms with higher financial leverage tend to be more resistant to the negative effects of overall firm pricing fluctuations and are therefore more stable.
Another important result of the present study is that international competition does not significantly affect domestic firms. In fact, there are some signs of limited competition due to increased foreign ownership of foreign-owned companies. However, most foreign firms compete on more local terms. Domestic firms tend to obtain greater foreign direct investment (FDI) as a response to high levels of domestic demand for capital. As FDI flows into the country, domestic output and prices rise relative to foreign output and prices.
Financial constraints are inhibiting domestic firms from increasing capital without having to raise external funds. Thus, current research addresses this gap by investigating the effect of government policy and other constraints on investment. In addition, domestic credit constraints limit banks’ ability to finance investment through domestic sources. This constraint is particularly noteworthy because it makes it difficult for banks to provide credit facilities for businesses.
An interesting result of the present research relates firm investments to human capital. Specifically, firms invest more in human capital when they face competitive pressures, such as those associated with entering new markets. Firms also use human capital to improve productivity. Moreover, human capital is important for large firms that need to replace employees more quickly than smaller firms.
A final outcome of the current research relates the level of economic freedom to foreign investment. Economic freedom has been shown to increase foreign investment. Additionally, economic freedom is associated with higher levels of foreign direct investment (FDI). Although economic freedom is most important for increasing levels of FDI, the results also indicate that political stability, the quality of the economy’s institutions, and other factors play a role in investors’ preferences for making investments. For this reason, political stability, the quality of the economy’s institutions, and other factors have been separately measured using multiple regression analyses.
To conclude, the regression result indicates that domestic growth opportunities are negatively correlated with political system strength, the quality of the economy’s institutions, and other economic variables. The regression result is statistically significant at p=.001, indicating that political system weakness significantly reduced the investment growth opportunity of the United States. These results suggest that economic policies have a negative effect on international investment decisions. Therefore, the United States should continue to work on improving its domestic policies and reform its political system to improve its economic attractiveness.
