Stimulus Package Increases Firm Investments But Not Their Investment Efficiency
The present paper discusses the effect of leverage on company investment. We begin by defining the notion of Leverage. Then we discuss why it is important to consider the effect of leverage on investment at both the local and national level. The final part of the paper discusses the effect of leverage on international investment. Finally, we conclude by briefly considering the effects of changes in tax rules on firm size and capital expenditure.
The paper establishes the important link between firm investment and business cycle fluctuations. The empirical results support the view that firms should be analyzed for changes in wealth because they can significantly impact productivity growth. However, no such significant relationship is discovered between firm investment for medium-sized firms. The same result is obtained for the stock market analysis of medium-sized firms only.
The present paper then examines the effects of changes in capital intensity and stock market sector dynamics on firm investment. It is found that overall savings, productivity growth, and employment do not improve much when firms invest in the stock markets. Even if savings increase, it is not substantial enough to offset the rise in asset valuation.
In terms of government intervention, there are two possible channels through which monetary policy can affect firm investments. One of these channels is through government subsidies. Government intervention can increase demand for the firm’s goods and services and reduce the external costs of production. Alternatively, government intervention can change the relative valuations of the stocks and shares. This may either reduce market friction or facilitate financial cycle stability.
To evaluate the efficacy of the two channel models, the present study first examines the effect of direct and indirect governmental regulation on firm investments during different economic scenarios. The results indicate that firms tend to make greater investment when the government supports business initiatives aimed at creating jobs. Surprisingly, the same analysis indicates that increased government investment also leads to less job creation and a rise in unemployment. Furthermore, this analysis also indicates that increased government intervention has minimal effects on firm investments during recession periods.
On the other hand, the study also suggests that firms are more likely to increase their investments when the economy is facing a financial crisis period. When companies are facing financial distress, they tend to cut costs in order to survive and invest in productive projects. Since the government has injected large amounts of funds into the economy through the recent economic stimulus package, these firms are finally realizing that it would be unwise to divert their investment into unproductive activities.