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Book part
Publication date: 24 October 2019

Tarek Ibrahim Eldomiaty, Panagiotis Andrikopoulos and Mina K. Bishara

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial…

Abstract

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial decisions affect growth of the firm, the latter must also be affected by either favorable or adverse selection. Therefore, the core objective of this chapter is to examine the determinants of each financial decision and the effects on growth of the firm under conditions of information asymmetry.

Design/Methodology/Approach: This chapter uses data for the non-financial firms listed in S&P 500. The data cover quarterly periods from 1989 to 2014. The statistical tests include linearity, fixed, and random effects and normality. The generalized method of moments estimation method is employed in order to examine the relative significance and contribution of each financial decision on growth of the firm, respectively. Standard and proposed proxies of information asymmetry are discussed.

Findings: The results conclude that there is a variation in the impact of financial variables on growth of the firm at high and low levels of information asymmetry especially regarding investment and financing decisions. A similar picture emerges in the cases of firm size and industry effects. In addition, corporate dividen d policy has a similar effect on firm growth across all asymmetric levels. These findings prove that information asymmetry plays a vital role in the relationship between corporate financial decisions and growth of the firm. Finally, the results contribute to the vast literature on the estimation of information asymmetry by demonstrating that the classical and standard proxies for information asymmetry are not consistent in terms of the ability to differentiate between favorable or adverse selection (which corresponds to low and high level of information asymmetry).

Originality/Value: This chapter contributes to the related literature in two ways. First, this chapter offers updated empirical evidence on the way that financing, investment, and dividends decisions are made under conditions of favorable and adverse selection. Other related studies deal with each decision separately. Second, the study offers new proxies for measuring information asymmetry in order to reach robust estimates of the effects of financial decisions on growth of the firm under conditions of agency problems.

Article
Publication date: 9 October 2017

Abdul Rashid and Muhammad Saeed

The purpose of this paper is twofold. First, based on the value optimization problem of the firm, the authors proposed a theoretical model for firmsinvestment decisions

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Abstract

Purpose

The purpose of this paper is twofold. First, based on the value optimization problem of the firm, the authors proposed a theoretical model for firmsinvestment decisions, which incorporates the effects of both idiosyncratic (firm specific) and macroeconomic uncertainty/risk. Second, the authors empirically estimate the proposed model for Pakistan.

Design/methodology/approach

The authors utilize an unbalanced firm-level panel data covering the period 1988-2013. To generate time-variant firm-specific uncertainty, the authors estimate the autoregressive model on firm sales for each firm included in the sample over the examined period. Firm-specific risk is also measured based on the square of the residuals of firms’ sales. Two measures of macroeconomic uncertainty are computed using the conditional variance obtained by estimating the ARCH model for consumer price index and industrial production index. Several alternative measures of both types of uncertainties are used to ensure the robustness of uncertainty effects. To mitigate the problem of endogeneity, the robust two-step system-generalized method of moments estimator is used to estimate the empirical model.

Findings

The results indicate that firms are likely to cut down their level of investment spending when either type of uncertainty increases. The results also reveal that the sensitivity of firmsinvestment decisions to macroeconomic (aggregate) uncertainty is higher as compared to the firm-specific uncertainty. The authors show that these findings are robust to different uncertainty measures used in the analysis. The results related to firm characteristics suggest that the firm-specific variables namely the debt to assets ratio, the costs of debt to assets ratio, and the sales to assets ratio are also equally important in the determination of investment decisions of corporate manufacturing firms.

Practical implications

The empirical findings of the paper are useful for firm managers, investors, and government authority. Specifically, the results help firm managers and investors to understand how firm-specific and macroeconomic uncertainty affects firmsinvestment decisions. The finding that firms cut their investment spending in times of macroeconomic instability implies that declines in firmsinvestment spending during the periods of macroeconomic turmoil may delay the process of recovery. Therefore, the policy makers should design such policies that encourage firms to invest more in economic crisis periods, which, in turn, would enhance the growth of the economy and help to overcome the problem of downturn/recession.

Originality/value

The authors first propose a theoretical model for firmsinvestment decisions based on the value optimization problem of the firm by incorporating the role of both firm-specific and macroeconomic uncertainty. Next, unlike most of previous studies, they estimate the proposed model for non-financial firms operating in Pakistan. The authors predict that a higher exposure to both idiosyncratic and macroeconomic uncertainties leads to lower investment in Pakistani manufacturing firms. Further, the authors hypothesize that both types of uncertainties have differential effects on firmsinvestment decisions.

Article
Publication date: 6 January 2021

Ben Kwame Agyei-Mensah

The purpose of this study is to investigate the influence of board characteristics on firmsinvestment decisions.

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Abstract

Purpose

The purpose of this study is to investigate the influence of board characteristics on firmsinvestment decisions.

Design Methodology Approach

The study used data sourced from annual reports of firms listed on the Ghana Stock Exchange from 2014 to 2018. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by a regression analysis which forms the main data analysis.

Findings

The multiple regression analysis results indicated that the proportion of independent directors and financial experts on the board are negatively related to firm investment. These findings imply that independent directors and financial experts on the board can help firms reduce overinvestment and improve investment efficiency.

Originality Value

The extant literature shows that the board of directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been little research on the role of the board of directors in corporate investment policy.

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 4
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

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Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 16 August 2021

Hamish D. Anderson, Jing Liao and Shuai Yue

Employing the anti-corruption campaign as an exogenous political shock, this paper examines how political intervention shapes the impact of financial expert CEOs on firm

Abstract

Purpose

Employing the anti-corruption campaign as an exogenous political shock, this paper examines how political intervention shapes the impact of financial expert CEOs on firm investment decisions.

Design/methodology/approach

This paper uses a sample of 2,808 Chinese firms listed in the Shanghai and Shenzhen Stock Exchanges from 2003 to 2016. Panel data is used for conducting the analysis controlling for firm, industry, and year fixed effects.

Findings

The authors found that CEOs with financial expertise are sensitive to political intervention when making investment decisions. First, financial expert CEOs spend more on R&D expenditure in private-owned companies and they are associated with less R&D expenditure in state-owned enterprises (SOEs). Second, financial expert CEOs are associated with higher investment expenditure in general, but they become less likely to invest more in the post-anti-corruption period. The reduction in investment expenditure due to the anti-corruption campaign is more pronounced in SOEs than in private-owned companies. Third, the anti-corruption campaign promotes R&D investment in general, but in SOEs, expert CEOs tend to be less likely to invest more on R&D after the anti-corruption shock.

Originality/value

This paper enriches the growing literature on the impact of political intervention and the role of the anti-corruption campaign on corporate behaviour.

Details

International Journal of Managerial Finance, vol. 18 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 16 November 2019

Qi Flora Dong, Yiting Cao, Xin Zhao and Ashutosh Deshmukh

The effect of tax policy on the repatriation of foreign earnings is a topic of ongoing discussion among policymakers, academics, and the popular press. It has become more…

Abstract

The effect of tax policy on the repatriation of foreign earnings is a topic of ongoing discussion among policymakers, academics, and the popular press. It has become more salient due to the 2017 Tax Cuts and Jobs Act (TCJA), which permanently removed repatriation tax. This paper synthesizes the academic literature examining US multinational firms’ responses to the repatriation tax holiday initiated by the 2004 American Jobs Creation Act (AJCA), which temporarily reduced the tax on the repatriation of foreign earnings. By synthesizing firm responses to the temporary tax reduction, we identify similarities and differences in: (1) theories about why and when repatriation tax affects firms’ repatriation decisions; (2) empirical evidence of whether repatriation tax affects firms’ repatriation decisions; and (3) empirical evidence of whether repatriation tax affects firmsinvestment decisions. The analyses provide insights into the effect of the permanent removal of repatriation tax under the TCJA and explore avenues for future research. This synthesis of the AJCA literature informs tax research and practice as well as policymaking.

Details

Journal of Accounting Literature, vol. 43 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 2 November 2022

Jaehee Gim and SooCheong (Shawn) Jang

This study aims to examine how information asymmetry, which refers to an information gap between a firm’s management and its investors regarding the firm’s true value…

Abstract

Purpose

This study aims to examine how information asymmetry, which refers to an information gap between a firm’s management and its investors regarding the firm’s true value, influences firms’ dividend and investment decisions in the restaurant industry. This study also investigated the moderating role of a firm’s level of franchising in the relationship between information asymmetry and these behaviors of restaurant firms.

Design/methodology/approach

This study used generalized method of moments panel regression analyses. Principal component analysis was also used to create a composite index of information symmetry.

Findings

This study demonstrated that in asymmetric information environments, restaurant managers tend to reduce dividend payments. In addition, this study showed that information asymmetry leads to restaurant managers’ investment inefficiency. However, the investment inefficiency of the restaurant industry was found to decrease as restaurant firms’ level of franchising increases.

Practical implications

Firms’ dividends and investment decisions are of great interest to investors because these decisions heavily influence investors’ wealth-maximization goals. By shedding light on the previously unrecognized determinants of dividend and investment behaviors in the restaurant industry, this study helps individual investors to make informed investing decisions.

Originality/value

Conflicting arguments can be made regarding the impact of asymmetric information environments on the dividend and investment behaviors of restaurant firms. This study aimed to verify these as-yet unclear relationships in the restaurant industry.

Details

International Journal of Contemporary Hospitality Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0959-6119

Keywords

Article
Publication date: 4 August 2022

Shih-Chu Chou

This study explores whether exposure to macroeconomic information provides bellwether firms with information advantages at the macroeconomic level and facilitates managers…

Abstract

Purpose

This study explores whether exposure to macroeconomic information provides bellwether firms with information advantages at the macroeconomic level and facilitates managers to utilize such informational advantage for investment decision-making. The author tests whether firms' macroeconomic exposure is associated with sensitivity of their segment-level investments to growth opportunities and how internal and external frictions affect this association cross-sectionally.

Design/methodology/approach

This study follows prior research to identify high-macroinformation firms and measures the level of macroexposure based on how closely the firms' underlying business varies with macroeconomic conditions. The main specification is a segment-level regression of investment on growth opportunities and an interaction between growth opportunities and the level of macroeconomic exposure.

Findings

The results indicate a significantly positive association between firms' macroeconomic exposure and sensitivity of segment-level investments to growth opportunities, suggesting that bellwether firms can leverage their greater exposure to macroeconomic and external information to improve the quality of their investment decisions. Further evidence shows that this positive association is decreasing in firms' corporate diversification level and is also decreasing in their foreign operation level, implying that internal and external frictions could limit the information benefits ultimately gained by firms from their macroeconomic exposure.

Originality/value

Accounting researchers have recently documented evidence that bellwether firms' management earnings forecasts convey timely information about macroeconomic states, suggesting that managers of certain types of firms are likely to have private macroeconomic information. The main research question in this paper is motivated by incorporating insights derived from recent accounting research findings to shed further light on the impact of firms' macroexposure on their investment decision process.

Details

Managerial Finance, vol. 48 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 23 September 2014

Donald K. Clancy and Denton Collins

The purpose of this study is to review the capital budgeting literature over the past decade.

Abstract

Purpose

The purpose of this study is to review the capital budgeting literature over the past decade.

Design/methodology

Specifically, over the years 2004–2013, we review works appearing in the major academic journals in accounting, finance, and management. Further, we review the specialized academic journals in management accounting. We examine the frequency of articles by journal and year published, the type of research method applied, and the topic area studied. We then review the research findings by topic area.

Findings

We find 110 articles appearing in the selected journals. While the articles increase in frequency, the research methods applied are predominantly analytical and archival in nature with relatively few experiments, case studies, or surveys. Some progress is observed for capital budgeting techniques and new methods for structuring uncertainty. The studies find that the size of capital budgets is about right for companies with high financial reporting quality, for liquid companies, during periods of normal cash flow, when the budget is financed by equity, for companies when they first go public or first go private. Tax rates and financial reporting methods for depreciation and tax expenses distort capital budgets. Organization structure and performance measurement can distort capital budgeting. Individual differences, especially optimism and honesty, can influence capital budgeting decisions.

Limitations and Implications

This review is limited to the major journals in accounting, finance, and management; and the specialized journals in management accounting. There is much research to be done on capital budgeting, especially case studies of actual practice and experiments related to individual and group decision processes.

Book part
Publication date: 13 August 2007

Yong Li, Barclay E. James, Ravi Madhavan and Joseph T. Mahoney

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real…

Abstract

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options in theory and practice, and propose several areas for future research. Our review shows that real options theory has provided substantial insights into investment and exit decisions as well as into the choice of investment modes. In addition, extant research studies have contributed significantly to our understanding of whether and how organizations can benefit from real options. Future research that addresses difficulties in applications will further advance both real options theory and practice in strategic management. We call for future generations of research to enhance the impact of real options as an emerging dominant conceptual lens in strategic management.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

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