Financial Factors Affecting Firm Investment Decisions
The financial factors affecting firm investment decisions are important to consider. High creditworthiness firms are highly sensitive to changes in internal cash flow while less creditworthy firms are not as sensitive. In the current research, Kaplan and Zingales (1997) used an objective sorting mechanism to measure the sensitivity of firms to changes in internal cash flow. These findings suggest that private equity investors and private debt holders tend to invest more in companies with high misvalued stock than in companies with lower misvalued stock.
Another issue with government and development bank funding for small firms is that there is very little evidence to support this hypothesis. While a few studies have suggested that there is a connection between misvaluation and private peer investments, few studies have examined the relationship between private firms and public equity. Moreover, the empirical evidence is inconsistent with both hypotheses, as the asymmetric information that private equity investors have towards a firm makes the investment decision less favourable for the latter.
In addition to the lack of government finance for small firms, the evidence from these studies shows that they do not finance investments significantly more than large firms. While programs that aim to increase the amount of money available to small firms are politically-motivated, they often fail to deliver on their promise. Most governments are only too happy to provide government funds to large companies, and they have no problem financing smaller ones. But if these governments do fund these initiatives, the results are mixed.
The evidence that there is a negative correlation between public firm misvaluation and private firm investment is mixed. The relationship between financial leverage and firm investment is not significant for firms with low information asymmetry, but it is present in both high-growth and low-information-asymmetric firms. As a result, programs focused on expanding small firm finance are unlikely to achieve their goal of increasing the number of firms in developing countries. Further, the lack of adequate legal and financial systems means that small firms cannot compensate for these factors.
The relationship between financial leverage and firm investment is negative for low-growth firms. It is positive for high-information asymmetric firms. It is positive for firms with lower information asymmetry. In addition, the relationship between financial leverage and firm investment is positive for small firms in developing countries. However, the relationship between financial leverage and firm investment varies across countries and industries. For example, in low-income countries, large companies may benefit from trade credit, while small firms do not.
A negative relationship between financial leverage and firm investment has been reported for small firms. The relationship between financial leverage and firm investment is also significant for low-growth firms. It is positive for firms with high information asymmetry. The relationship between financial leverage and firm investing is significant for low-growth firms. The negative relationship between financial leverage and firm investment is not observed for small firms. A positive relationship between the two variables can be found. These relationships are robust to alternative treatment.