The Presence of a Common Cause of Firm Investment Misvaluation
“Firm Investment” is a concept often used in business. It mainly focuses on finance, economics, accounting, and other aspects of business. The paper uncovers how financial leveragedness is directly and negatively correlated to firm investment. It is also seen that the effect of financial leveragedness on firm investment is especially strong for high-information asymmetric companies. A highly leveraged firm will be characterized by large investments not only in fixed assets but also in equity and retained earnings. This means that in order to compensate for the potential losses through dividends and capital gains, high rates of interest have to be paid by the owner.
Therefore, the purpose of this working paper is to highlight the effects of bank supervision on firm investment. To do this, it has been divided into two categories: first, bank supervision without supervisory measures; second, supervisory measures with bank supervision. Supervision without bank supervision is achieved when there are no requirements for leverage or credit scores. In this case, banks lend money only after receiving payment from the borrower. If the banks decide to loan more money, they follow the usual lending procedures, i.e., they require borrowers to make their payments regularly and to pay in a timely manner.
Under centralised bank supervision, banks are required to submit detailed reports to government agencies about the activities of their activities. In addition, banks have to formulate policies that meet certain objectives of the government. For instance, they have to assist the economic recovery by ensuring appropriate credit conditions, increasing financial liquidity, maintaining monetary policy consistency, and strengthening the balance sheets of their institution. Centralised banks therefore have a major role to play in the overall economic development of the country.
According to the present paper, four factors need to be taken into account for firm investment decisions. Firstly, banks should decide whether to lend money on the basis of credit risk, interest rates, or both. Secondly, firms should evaluate the risks to the projects proposed by projects with partner banks. Thirdly, the decision-maker institutions should incorporate a risk-benefit analysis, taking into account the expected benefits and the costs involved in each alternative.
The present study shows that euro area countries have a number of options for improving the functioning of the banking system. However, the possibility of a single supervisory mechanism is still present, which could facilitate the cooperation of all institutions very easily. When a decision is based on profitability or on the expected benefits, the decision-maker institutions should have an effective and efficient set of tools to assess the risks and to adjust the investments accordingly. Finally, a decision should not be based on the political decision-making process, but rather on the overall economic performance.
According to the present study, the existence of a set of potential dangers, associated with misvaluation-induced risks, exists in the euro area. These dangers appear to be linked to the excessive leverage that existing financial instruments provide. It also appears that the existence of excessive internal cross-system links may be another source of the problem.
