The relationship between firm investment and misvaluation is not well understood. In the case of Vietnam, for example, the government does not finance misvaluation-induced investment, and this is often the result of financial constraints. In contrast, private firms finance this kind of investment with debt. However, the effect of the private sector’s financial constraints on firm growth is still unclear. Here, we will discuss the most prominent factors that impact the relationship between firm investments and misvaluation.
First, it is important to distinguish between equity and venture capital firms. These two types of firms acquire companies in auctions. They use various strategies to enhance the value of the company. For example, they may introduce new processes or technologies. They may also cut down on workers or close unprofitable units. If the company is no longer profitable, equity firms can exit by selling it to another equity firm, a strategic buyer, or through an IPO.
The relationship between financial leverage and firm investment is positive for firms with low information asymmetry. The opposite is true for firms with high levels of information asymmetry. Small firms are more likely to receive government funding than large ones. The relationship between leverage and firm investment is not significant for firms with high levels of growth. The evidence presented in this article points to a connection between financial leverage and firm size and the ability to attract foreign capital. The former is more likely to drive investment, while the latter is a prerequisite for growth.
The relationship between misvaluation and private peer investment is positive for smaller firms. This relationship is negative for larger firms. If the ratio of private firm investments to public firm investments is positive, then the investment to capital of private firms will be higher. The reverse is true for larger companies. Moreover, the firm-size effect does not affect the firm-size relationship. The findings of this study are robust to other alternative treatments, particularly the growth opportunity hypothesis.
In addition to these two variables, firm size also affects investment. Equity firms, which typically purchase firms at auctions, often invest in the company’s value by implementing a variety of strategies. They may introduce new technologies and processes. They may even lay off workers to improve profitability. For smaller companies, equity firms can sell the company to another equity firm or a strategic buyer. It is possible to exit the firm through an initial public offering, but this requires a huge amount of risk.
Equity firms usually purchase companies through auctions and increase the value of the firm through various strategies. They may introduce new processes and technologies to increase the value of the firm. The equity firms may also close units and lay off workers to make the company more profitable. Alternatively, they can sell the company to another equity firm or a strategic buyer or exit the company through an IPO. In this way, the company has multiple options to raise money. And, despite the many challenges, the returns are well worth the effort.