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Determinants of Firm Investment Decisions

Firm Investment

Determinants of Firm Investment Decisions

In this article, we study the determinants of firm investment decisions. We examine firm investments in four countries: Moldova, Romania, Russia, and Serbia. We find that profitability significantly influences firm investments, but that cash holdings and size only affect the decision of the managers of smaller firms in Moldova and Serbia. We also examine the determinants of firm investment in the real estate sector. The results of the study show that larger firms tend to invest more, and that profitability has no effect on firm investment.

One of the most important factors for the optimal allocation of funds for a firm is the level of financial leverage. Privately held firms with a high information asymmetry may find themselves with an overly-large portfolio that reduces their ability to allocate resources appropriately. In addition, firms with high levels of leverage may experience a significant underinvestment in their assets. Hence, it is important to assess the determinants of financial leverage and firm investment in this context.

The relationship between financial leverage and firm investment has received a great deal of attention in recent years. The classical model, which assumes that firm value is not independent of debt policy, asserts that a new project is necessary to boost firm value. This model is known as the LSM model. The traditional case assumes that debt policies are irrelevant to firm value. If a new project has no effect on the firm’s balance sheet, then it is inefficient to invest in it.

The financial leverage of controlling owners also influences firm investment. While it is beneficial for publicly traded firms, it has a negative impact on privately owned firms. Nevertheless, the relationship is not significant for high-growth firms. Thus, the relationship between financial leverage and firm investment is important to consider. The firm’s ability to allocate its resources depends on the level of debt. When the management of a business is unable to determine its value through capital budgeting, it is unlikely to invest in new projects.

The relationship between debt policy and firm investment has been a source of controversy in recent years. In general, a firm’s debt policy does not affect the value of the firm, and this makes it more attractive for firms. This means that firm investment decisions are based on the capital budgeting decision. Although firm value is not dependent on debt policy, it is necessary to understand the impact of financial leverage on a company’s financial condition.

Financial leverage of the controlling owners has a negative impact on the level of firm investment. A private firm’s capital stock is less affected by financial leverage than a publicly traded firm. The authors use data from a panel of large firms that provides detailed information on the levels of cash, inventory, and debtors. The findings of this study support the traditional view that a firm’s debt policy is not the only factor that affects the level of firm investment.