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Determinants of Firm Investment

In this article, we examine the determinants of firm investment. We focus on four countries: Moldova, Russia, and Serbia. The sample contains 170 firms. Profitability significantly influenced firm investment in each country. In addition, cash holdings of firms positively affected their decision to invest. In Moldova and Serbia, higher firms’ profits encouraged managers to invest more in their business, while those in the service sector and real estate sectors were less likely to invest.

Firm Investment

In contrast, firm investment is not influenced by credit worthiness. Financial factors, such as internal cash flow, are not as important as the firm’s size, and there are no correlations between creditworthiness and investment. However, the relationship between creditworthiness and firm investment is strong in low-growth firms. Despite this, many researchers disagree. The authors of this paper suggest that financial leverage is not a factor in determining the extent to which firms invest in formal training.

The authors test this assumption by using a panel of large firms with detailed data on training, workforce, and capital stock. They find that firm investment is positively related to firms’ ability to raise external funds, and that debt financing and equity financing significantly affect firm investment. While this finding is consistent with a number of alternative hypotheses, it is not robust when considering other variables, such as the degree of internal liquidity, and the characteristics of firms.

Financial leverage is a significant determinant of firm investment. This is true whether the firm is high-information asymmetric or low-growth. The relationship between financial leverage and firm investment is also significant for firms that are low-information asymmetric. The relationship between debt financing and firm investment is weak in high-growth firms. A more rigorous measurement of creditworthiness and financial leverage may be needed to properly understand the association between debt and firm investment.

As mentioned earlier, firm investment decisions are related to financial factors. For example, firms with high creditworthiness are most sensitive to internal funds, whereas firms with lower creditworthiness are not. Moreover, the size of a firm has an effect on the decision to invest. The amount of investment is also a significant factor in determining the size of a firm’s capital stock. In addition, the return to formal job training differs widely between firms.

In contrast, in case of high information asymmetric firms, financial leverage affects firm investment. In high-growth firms, it is more relevant to have a high level of internal funding than to have low-creditworthiness. When there is high risk, the investment returns are lower. This is consistent with the literature. The relationship between financial leverage and firm investment is robust across all studies. These findings are not surprising and may be used as a guide for future research.