Fundraising for Medical Professional Education
Financial reports are always required for financial institutions and all other bodies that have a mandate to keep track of stock ownership. The methodology followed for arriving at a conclusion is always dependent on the document that is to be derived. However, there are many debates on whether or not an optimum balance is possible in financial reports. This paper explores the question by exploring the concept of firm investment. The paper then uncovers from theory, various agency assumptions about financial Leverage, and finally explores the theoretical implications of financial Leverage on firm investment.
Drawing insights from theory, this paper discovers that financial Leverage is significantly and negatively associated with firm investments. Furthermore, it is seen that the negative impact of Leverage on firm investments is especially important for small, high information asymmetric companies. Also, misvaluation-induced errors are typically associated with large financial corporations. On the other hand, with respect to medium-sized and small-scale organizations, the results of the present study reveal no support for the hypothesized statement. However, given the increasing importance of Leverage in accounting analysis, potential investors are encouraged to consider the results of previous studies as well as the implications of Leverage on firm investments.
As previously mentioned, the main argument of the present study is that the degree of misvaluation is dependent on the existing ownership percentage. Specifically, it is postulated that firms with higher ownership percentages will experience greater financial risk because of the greater exposure of ownership to risks and misvaluation. However, contrary to the hypothesis, it is found that although there is a statistically significant relationship between ownership percentages and the degree of misvaluation, the strength of this relationship deteriorates significantly after a specific point of investment.
Based on previous research, firms should avoid using financial models with absolute return functions because such models make the assumption that all future economic value is exactly equal to the value of the present asset, i.e., present discounted cash flows. As such, the model would predict excessive risk from high levels of current stock price without taking into account future discounted cash flows (refer to the definition of discounted asset valuation in the previous section). The present study draws its statistical support from previous research that examines the relationship between firm size and financial performance, focusing on the distribution of assets and liabilities across firms. It is found that the largest companies are not necessarily the best performing firms, but rather the ones with the greatest average level of assets and liabilities.
The present study further draws its support from the assumption that firms with a larger investment portfolio are more able to weather fluctuating market conditions and continue to effectively manage their balance sheet. To test this assumption, financial firms were divided into two categories: large and small. Based on historical results, the results of the present study find that firms with larger investment portfolios were generally more successful in stabilizing their balance sheet during the recession period. Finally, we investigate the effect of an equity-rich corporate bond index on firm performance. Our analysis indicates that this type of index, when used as a replacement for traditional fixed income instruments, can improve overall performance relative to other types of fixed-income instruments.
This paper is part of the research project entitled “Theory and Practice of Financial Firm Investment Policy.” The research was supported by a grant from the Office of Research and Development at the U.S. Department of Labor. All the findings herein are the personal opinions of the author(s) and not necessarily confirmed by federal agencies. This article is for educational purposes only and is not intended to be used as professional medical advice. Please consult your physician for your health care concerns.
