When it comes to private peer investments, the misvaluation of a public firm and private investment by its peers are highly related. According to the economic competition hypothesis, there is a negative relationship between public firm misvaluation and private peer investments. The alternative shared sentiment hypothesis predicts the opposite relationship. Both hypotheses have the same empirical result: the misvaluation of a public company and private peer investments are positively related. Mutual fund flows serve as an exogenous instrument to measure misvaluation.
Financial leverage is negatively related to firm investment. This relationship is stronger for firms that are low-growth and have high information asymmetry. It is not significant for firms at high growth stages. However, it is significant for companies with high levels of leverage. This study indicates that financial leverage can have a negative impact on firm investment. Therefore, if you want to increase your chances of investing in a firm, look for a firm with a lower financial leverage.
Another study found that financial leverage was negatively related to firm investment. This relationship was particularly strong for low-growth firms with higher information asymmetry. But this relationship was not significant for high-growth companies. Moreover, it was not statistically significant when the firms were categorized by their size. This indicates that the firms with high financial leverage tend to be higher-growth. As a result, financial leverage is not always the best choice for firms at different growth stages.
Another research showed that financial leverage and firm investment were negatively related in developing countries. The relationship was more significant for firms with low information asymmetry and low financial leverage. This relationship was significantly stronger for firms that are high-growth but still small. Further, there was no difference between firm size and financial leverage in developed and underdeveloped nations. So, how can this study be used to make a difference? To begin, it should analyze how financial leverage and firm investment are related for small-scale firms.
In developing countries, financial leverage and firm investment are negatively related. But the relationship is stronger for high-growth firms. But it is not significant in underdeveloped countries. The relationship is weak for small firms. This means that the ratio of large firms and small firms in the same country is not equivalent. As a result, larger companies are more likely to receive government support. A lack of government funding can lead to the failure of smaller firms. This means that firms must use alternative sources of finance.
In a developing country, financial leverage is positively related to firm investment. But it is not significant for small firms. Despite this, the relationship between financial leverage and firm investment is positive for low-growth firms. Further, the relationship between financial leverage and firm investment may be weak for large-growth firms. It can be positive for both types of companies, as it can provide an opportunity for the smaller firms. But in many developing countries, the relationship is negative for small companies.
