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Firm Investment Analysis

The present study shows that the relationship between firm fixed investment and firm growth is more significant for small-sized companies. But no such significant relationship is observed between fixed investment and large-scale business firms. This implies that irrespective of the size of the organization, the present study still does not show any significant relationship between investment and firm growth. Similarly there is a negative relationship found between fixed investment and financial accounting practices for medium-sized enterprises. Further analysis indicates that accounting practice and financial reporting procedures may not be important to firms with fewer financial assets. Such firms may simply satisfy their own need for expansion.

Firm Investment

Another major branch of research that comes under the area of firm investments is the concept of misvaluation. According to this hypothesis, stock prices are subject to biased institutional and exogenous effects. In other words, the present stock prices of public firms are subject to random errors, which could either increase or decrease the value of stocks on the market. The random errors could occur because of the inefficient performance of internal factors, poor management policies, poor investment strategies or other such factors. These factors could result in the occurrence of misvaluation.

To explain the above-mentioned phenomenon in terms of individual-company-level variables, it is necessary to specify and analyze the existing concepts. According to the previous assumption, the efficient operation of internal factors is the basis of firm investments. The present study therefore predicts that companies that have high levels of assets and sales are likely to experience higher levels of misvaluation. To quantify the potential sources of misvaluation, a technique called the asset-income-price (AIP) technique is used.

The assets of a company to represent its net worth. The present stock price represents the current value of assets less net worth of the enterprise. A firm’s AIP is the difference between its present stock price and its effective interest rate on debt. Other factors that affect firm AIP include current interest rates, capital gains, depreciation, and reinvestment. A higher current interest rate or an increase in the amount of capital gains may lead to higher AIP. A lower AIP indicates that a firm has more liquid cash compared to its debts.

The goal of any investment strategy is to achieve a positive net value (NPV). The concept of the NPV refers to the difference between actual stock price and the effective interest rate on the debt of a firm. Any investment portfolio should aim at maximizing the net worth of the portfolio as a whole, with particular emphasis on its equity component.

The effectiveness of an investment portfolio lies in the management of the portfolio. A variety of management techniques are employed in order to minimize the risk of loss and to ensure that the portfolio continues to attain its desired returns. Management results in the identification, measurement, and prioritization of potential risks and the adoption of strategies to mitigate these risks. It also involves the discipline of a firm in terms of providing timely and accurate information to underwriters and investors about the state of their portfolio. These strategies and measures help to minimize losses and the possibility of misvaluation.