A recent study has identified the determinants of Firm Investment and how these factors may affect it. The research examined four countries and a sample of 170 firms for each. In Moldova, Russia, and Serbia, profitability was positively correlated with firm investment. In these countries, cash holdings and size of firm were positively associated with investment. Managers were more likely to invest if they had higher profitability. Therefore, a company’s size is likely to increase the likelihood of it being profitable.
The findings also show that financial leverage negatively correlated with firm investment. The relationships between financial leverage and firm investment are more pronounced for low-growth firms than for high-growth firms. However, the relationship between financial leverage and firm investments is not as strong for large firms in developing countries. As a result, policies and practices that promote a high-risk environment for investing in small firms may not necessarily be the best bet for them. Moreover, financial institutions do not lend money to small firms as compared to large ones.
Moreover, sensitivity analysis reveals that profitability is a significant factor in predicting firm investment. In the service and real-estate sectors, profitability significantly explained firm investment. In the case of both sectors, financial development was lower than expected. So, the research suggests that these factors are related, but different. It is also important to note that firm size and the size of the company are the most significant determinants of firm investment. The results indicate that firms with large size are more likely to invest in large-cap companies.
As the result of sensitivity analysis, it was found that financial leverage is negatively related to firm investment. This relationship holds true for service sector and real estate sector firms, though it is not as significant for smaller-capital firms. Although this study is an early stage, it shows that it is necessary to find ways to improve the financing environment for smaller-scale businesses in developing countries. So, we can say that the research reveals that a large-cap company may be more likely to receive government funding.
Besides profitability, financial leverage also negatively influences firm investment. A small firm with high financial leverage will have higher profits than a larger one, but a large firm will have lower profits. The study also shows that a firm’s financial strength is not a significant factor in determining the decision to invest in a certain sector. For this reason, there is a need to improve the legal and financial system of the firm in a developing country.
Financial leverage is not significantly related to firm investment. This relationship is stronger for larger firms than for small firms, but it still has some influence. The relationship between firm investment and leverage is also stronger for smaller firms than for large-cap firms. In addition, financial leverage is a determinant of the firm’s profitability. In addition to this, it also explains its decision to invest in a particular sector. The research shows that the economic situation of a firm will affect the amount of money it can borrow.