Department of Finance at MingDao University,National Yunlin University of Science & Technology
Abstract:
We set out in this study to examine the relationship between the financing decisions of firms and their level of inefficient under- or over-investment. We demonstrate that on the one hand, in those firms with valuable investment opportunities, the actual level of investment invariably tends to less than the optimal level (a problem of under-investment), whilst on the other hand, firms with no real valuable investment opportunities will often tend to invest more than the optimum level (a problem of over-investment). We carry out two types of empirical tests, analyzing the level of investment for maximum firm value (dependent upon the quality of the investment opportunities) so as to gauge the relative magnitude of the under-investment and over-investment effects. Firstly, from an examination of the relative changes in the investment intensity of firms following public equity and debt offerings, we find that those firms issuing equity tend to increase (reduce) their investment by less (more) than similar firms issuing debt. Secondly, we examine different financing decisions in an attempt to determine whether such decisions represent the underlying cause of such inefficient investment.
