Three Factors That Are Considered by Firms Considering State Stimulus Package Stimulus
The research paper discovers that firm investment is inversely correlated with firm growth and vice versa. But financial leverage isn’t important for small-business firms. However, no strong relationship is identified between financial leverage and high or low-performing firms. Also, the authors find that the relationship between growth and firm investment is negative in all scenarios.
As with all economic factors, firm investment is dependent on the economy. Most importantly, entrepreneurs must plan carefully and invest according to their business model. Entrepreneurs must evaluate if their firm is growing fast enough to justify additional resources. If it is not, then perhaps entrepreneurs should reconsider if they are planning to sell the firms for a quick sale. Otherwise, the benefits of a fast growing firm should more than compensate for the increased costs of capital for a successful sale.
For all firms, potential investors must first seek approval from the bank before they can proceed with a deal. If the bank refuses, a working paper may be needed for the entrepreneur to provide an acceptable explanation as to why the investment is unprofitable. Otherwise, the entrepreneur would lose his investment through the various aspects of supervisory, credit, accounting, and legal issues. An effective supervisory process consisting of the following key features is necessary for overall firm investment success:
First, empirical results are required for all firms. Not only do investors need firm-specific empirical results, but also overall. Without such results, it is difficult to draw conclusions about investment viability. This is especially true when the purpose of such an exercise is to examine the effects of financial instruments in terms of return on equity and growth. The goal of such an exercise is to provide information to individual managers and owners about how well a firm invests its funds compared to other similar companies.
Second, potential firms need to consider long term perspectives. Contingency plans and stimulus package costs must be examined relative to overall business models in order to assess whether potential firm investments are worthwhile. The most common way to evaluate this aspect of long term viability is through the use of the Return on Equity (ROE). The Return on Equity measures the value of a firm’s net worth at the end of a defined period of time, including reinvestment earnings and repurchases of equity. The purpose of this type of analysis is to provide a managers and owners of firm investments with a means of comparing different firm investments relative to one another, particularly during a period of economic and financial crisis.
The third factor that must be considered is that of centralised supervision. When banks are considered, one of the key concerns is the possibility of banks taking too much or too little risk. In some cases, this is justified through the existence of a regulated system in which banks must conform to certain criteria (such as minimum guaranteed interest rates) or face government sanctions. In other instances, however, the existence of government supervision may simply act as an impediment to firm investment decisions. If a firm is subjected to centralised supervision, then it is likely that its performance will be more closely regulated than would be the case if it was left to operate under less rigid constraints.
