International Capital Flows Determine Foreign Direct Investment and Domestic Policy Tightness
To evaluate the relationship between firm size and firm investment, this article will show how firm investment decisions are affected by financial leverage. Using real case studies and an illustration of finance, this article shows how leveraged a firm is and the effect it has on investment decision-making. The paper strives to demonstrate how increased financial Leverage impacts company investment and the scope to which this relation is dependent on the degree of information asymmetry and growth rate.
Using agency theory, this article first examines the impact of firm investment on firm valuation. Drawing insights from various agency theories, this paper finds that increased financial Leverage negatively and significantly impacts firm valuation. Moreover, it is found that the negative impact of financial Leverage is particularly significant for high-end firms. The authors then examine alternative measures of firm valuation, such as market capitalization, asset value, intrinsic value, price-earnings ratio, and dividend yield. Using data from different countries, they find that companies with higher returns tend to have lower Leverage.
Using a theoretical model of governmental stimulus package, this paper evaluates two competing interpretations of the stimulus package and its impact on firm investments. One model portrays the package as a potential stimulus package that reduces firms’ profitability and raises the cost of capital. The other model portrays the stimulus package as a benign event that causes only minimal changes in firm investments that lead to slight changes in Firm Investment (FICO score). The results of this study indicate that although the government intervention may have a significant impact on firm investment decisions, its effects are transitory and are not directly related to the FICO score.
External finance, including foreign direct investment and domestic credit, has been a major driver of increased economic freedom since the early 1990s. The recent global economic crisis has had a profound effect on external financing. However, firms are still able to obtain a substantial amount of external finance, even in the post-crisis environment. This research discusses three alternative explanations for the relatively resilient nature of domestic credit after the global crisis. These alternative explanations – increasing efficiency and productivity, higher spending by households and corporations, and increased foreign direct investment – all result in a reduction of the distortion caused by financial liquidity constraints.
The present analysis makes use of both theoretical and empirical techniques to evaluate the impact of the US government’s fiscal stimulus package on firm investment decisions. It first examines how the fiscal stimulus package increases the efficiency and productivity of firms. To achieve this end, we begin by considering the relationship between firm size and economic output. Our main analysis focuses on the effect of the fiscal stimulus package on firms’ decision-making capacity. We then consider the implications of this decision-making function on domestic credit risk, and finally address the implications of this fiscal policy move on bank credit interest rates.
We first address the theoretical question of why firms invest. Based on the existing literature, we conclude that firms make efficient investment decisions only when they are operating in a domestic credit environment that is dependent on stable demand growth. For firms operating in international markets, there is a significant variation in the level of domestic lending conditions across countries, which can constrain the allocation of capital across firms and ultimately affect firm investments. Finally, we test the sensitivity of firm investments to changes in fiscal policy in domestic credit conditions.