Corporate investment sensitivity to equity market misvaluation

Capital reduction, financial characteristics and corporate governance

Purpose The purpose of this paper is to analyze and evaluate the impacts of equity market timing on corporate capital structure policies in Indonesia by apply Baker and Wurgler’s analytical approach to firms in Indonesia to see, first, if that approach applies to Indonesian firms and, second, if it can be generalized to other emerging markets. Design/methodology/approach This study will focus on capital structure policies based on Market Timing Theory in developing countries, which uses the panel data of companies listed in Indonesian Stock Exchange after IPO. The companies used as research object are 70 firms in the non-financial/non-banking sector with the observation period of 2000–2015. The period of measurement is five years after IPO. Using a past market value in which equity market timing is measured in two-time measurements, i.e. yearly timing and long-term timing to prove its persistence. Findings Consistent with equity market timing theory, the results suggest that firms tend to issue equities when their market valuations are relatively higher than their book values and their past market values are high. As a consequence, the firms become underleveraged or have their debts reduced in the short run. The results of long-term measurement on equity market timing do not appear to affect the firms’ capital structure decisions due to the firms’ relatively quick adjustments of optimal capital structures. The conclusion is that equity market timing is an important element in the short run but not in the long run. Research limitations/implications The results of this study describe how firms in Indonesia take advantage of temporary market share fluctuations through equity market timing in their capital structure policies before ultimately making adjustments to the directions they are targeting. Practical implications The use of equity market timing is more aimed at reducing the debt ratio and avoiding unfavorable conditions in the debt market, as well as taking advantage of the capital gains derived from the differences in their stock prices. This study also has practical implications on investment policies that need to consider the adaptation factor of the industrial environment when it comes to making capital structure decisions, including how the entity must take policy when uncertain economic conditions. Social implications Through the research behavior of capital structure more in-depth decision is expected to provide an overview for investors widely in determining investment policy. Thus, the investment strategy is more planned and can also anticipate unexpected conditions. Originality/value This research is the first study to analyze and to evaluate the impacts of equity market timing on corporate capital structure policies on post-IPO firms in Indonesia. This research is an empirical study that investigates the relevance of equity market timing considerations in the determination of debt-equity choices in the capital structure, included in the conditions of the global financial crisis.

PurposeThis study aims to examine how corporate financial flexibility, financial sector development and the regulatory environment influence corporate investment decisions in an emerging economy after controlling for several macroeconomic factors.Design/methodology/approachThe authors estimated random-effects models to empirically examine the impacts of corporate financial flexibility, banking sector development, equity market development, regulatory quality and corruption on corporate investment decisions. The empirical analysis is based on an unbalanced annual panel data set of a sample of 198 non-financial firms listed on the Pakistan Stock Exchange for the period 1992–2018.FindingsThe results show that financially flexible firms tend to invest more. The increased banking sector development, stock market development and better regulatory quality play a pivotal role for enabling firms to increase their investment ability. However, the results reveal that corruption acts as a barrier and reduces corporate investments during the examined period. The results suggest that unused borrowing capacity is a good source of financial flexibility. These results strongly support the pecking order theory, which explains why firms incline toward internal sources for financing their investments and why they prefer debt to equity when go for external financing.Practical implicationsThe empirical findings of the study enable corporate managers to make better financing and investment decisions by understanding the significance of the attainment and maintenance of the corporate financial flexibility to enhance firm value. Furthermore, the findings enable corporate managers to examine and understand the role of banking sector development (BSD), equity market development (EMD), regulatory quality and the role of corruption in affecting corporate firms' investment ability, allowing them to make appropriate investment decisions, especially from an emerging economy perspective. The findings also help investors in making appropriate investment decisions while they are purchasing financial assets. Finally, the findings of the study have some implications for regulators as well. Specifically, the findings suggest that the authorities should implement economic and financial policies favoring banking sector as well as equity market development to enhance corporate investment.Originality/valueThe study significantly adds to the literature by examining the impact of financial flexibility, financial sector development and regulatory environment on corporate investment decisions. According to the authors' knowledge, the empirical evidence examining the impact of all of these factors on corporate investment is very scarce. Therefore, this study is an effort to fill the gap left in the literature.

In this paper, the effect of market and macroeconomic uncertainties on corporate investment decisions was examined using the real option investment theory. Two types of uncertainties were investigated: macroeconomic uncertainties (exchange, interest and inflation rates) and market uncertainty (stock market volatility) while corporate investments were measured as the sum of the changes in capital stock and depreciation. Data were obtained for the period 2005-2019 and the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) estimation technique was employed. The results showed a significant difference between the effects of macroeconomic and market uncertainties on corporate investment decisions. We found that macroeconomic uncertainty of inflation rate has positive relationship with corporate investments, with a coefficient of 0.35071, and interest rate uncertainty (0.15567) and exchange rate uncertainty (-0.07852) were also statistically significant, whereas the linear market uncertainty has a negative value of -0.00173 and the quadratic market uncertainty (0.00520) was statistically insignificant. Therefore, interest rate volatility and inflation expectations are not factors constraining investment growth; however, exchange rate uncertainty exerts a substantial negative influence on corporate investment in Nigeria. Given the findings, the study recommends, among others, an appropriate and stable exchange rate policy that makes for easy business planning and forecasting by rational investors. To achieve a stable exchange rate that would bring about increased investment, the government should implement efficient macroeconomic policies, such as those that minimize the structural rigidities in the economy.

Based on the unique ownership structure of stated-owned enterprises（SOEs）in China, we examine the influence of expected tax burden on corporate investment decisions. Prior researches indicate that the efficiency of SOEs is lower than non-SOEs, which is proved in stock market as well（Wu, 2012; Yao and Zhang, 2001）. There are two explanations for this phenomenon: property right view and policy burden view. The property right view believes that the main reason for the SOEs’ low efficiency is unclear definition of property rights in SOEs（Zhang, 1997）. However, the policy burden view instead argues that excessive social responsibility and lack of reasonable market evaluation index lead to the low efficiency of SOEs（Lin et al, 1998）. In this paper, we find that SOEs care tax when they make investment decisions, which is consistent with the policy burden view. We also indicate that the main reason for this phenomenon is a unique agency problem caused by the fact that the state is the controller of SOEs, which is also consistent with the property right view. We analyze state ownership structure from a tax perspective, examine the influence of the expected tax burden on corporate investment decisions, and then integrate two explanations mentioned above. In traditional corporate finance theory, both state-owned and non-state-owned controlling shareholders have indiscrimination. Both of them get returns on investment according to the proportion of shares, and the private benefits of control at the same time. However, compared with other types of shareholders, the governments, as the ultimate controllers of SOEs, can not only get equity gains and control rights, but also get tax revenues paid by the companies. Although the governments can also obtain tax benefits from private enterprises, it is difficult for the governments to ensure tax revenues by intervening directly in business decisions of the private enterprises. In contrast, in the SOEs, the governments as the controlling shareholders can directly intervene in the business decisions of SOEs, so as to ensure the implementation of the tax revenues. Unlike the equity gains and the private benefits of control rights, the tax benefits are monopolized by the state. Therefore, the tax benefits could not be incorporated in the market price, which makes the market value underestimate the overall value of the state-owned controlled shareholders to a certain extent. When there is a conflict between tax benefits and returns on equity, the governments are more inclined to get exclusive tax benefits. The private benefits for state-owned holding rights cause the special agency problems between state-owned controlling shareholders and minority shareholders. This paper aims to clarify and analyze how agency problem affects corporate（especially SOEs）investing decisions. This paper takes the sample of listed companies from 2004 to 2013, and compares the relationship between corporate investment and expected tax burden under different ownership structure of listed companies（hereinafter referred to as ‘investment-expected tax burden sensitivity’）. We find that, compared with private holding listed companies, investment-expected tax burden sensitivity of SOEs is significantly reduced; when infrastructure investment return rate of local government is higher, that is to say the tax revenue demand of the local governments is bigger, the effect of state-owned shareholders on investment-expected tax burden sensitivity is weaker. The empirical results of this paper support the theoretical hypothesis that private benefits implied by tax is one of the important differences in the property control of listed companies in China. Therefore, tax should not be ignored when comparing and analyzing the different ownership structure and its mechanism of action. From the perspective of governmental exclusive right of taxation, this paper points out that there is a unique agency problem between state-owned controlling shareholders and other shareholders in SOEs. We study the role of ownership structure in corporate financial decision-making, especifically corporate investment decisions, from a perspective of tax benefits under the specific background in China. This paper tries to provide empirical evidence and new research perspective for further investigation into the effect of ownership structure on corporate financial decisions.

PurposeOur purpose is to explore how culture’s impact on investment is depending on uncertainty levels.Design/methodology/approachThis study investigates the interplay between national culture, uncertainty, and corporate investment decisions. Focusing on the uncertainty avoidance dimension (HUA) from Hofstede’s culture framework and utilizing the World Uncertainty Index (WUI) as a measure of uncertainty, this research explores how culture’s impact on investment is depending on uncertainty levels.FindingsOur results reveal that high HUA countries lower long-term investment during periods of heightened uncertainty, particularly in riskier investments like R&D, rather than capital expenditure. This relation is more pronounced for smaller firms. The findings suggest that HUA is associated with less risk taking, primarily when uncertainty is high. Furthermore, we demonstrate that the interaction between HUA and uncertainty exerts more significant and consistent effects on corporate investment than other cultural dimensions, religion, and various formal institutions, contrary to prevailing literature.Originality/valueThis study looks at the relationship between national culture and corporate investment under ambiguity, and what are the implications for risk taking. If national culture is related to riskier investments, such as R&D, relative to safer investments, like capital expenditure this would imply that risk taking is explaining the relationship between national culture and corporate investment. This relation should be clear during uncertain times. This is the first study to include the moderating effects of the level of uncertainty on the relation between national culture and corporate investment (or financial decisions in general).

Climate Change and Corporate Investment Decisions

Purpose This study aims to examine the impact of stock mispricing on corporate investment decisions by taking the sample of non-financial firms listed on the Pakistan Stock Exchange during the period of 2008-2014. Design/methodology/approach To measure the mispricing, this study decomposes the market-to-book ratio into mispricing and growth components and measures corporate investment by capital expenditures. Fixed and random effect panel regression models are used to estimate the results. Findings Results of the study show that firms issue overvalued equity to finance the capital expenditures. Consistent with other studies, the relationship between stock mispricing and investment is more prominent in the financially constrained firms. In addition, cash flow investment sensitivity is higher in financially unconstrained firms. Practical implications Nonetheless, the results give important implications to the Pakistan Stock Market on how the mispricing enhances the welfare by relaxing the financial constraints and allowing the managers to make investment in profitable projects that otherwise go non-funded. These findings have interesting implications for further research in the literature of finance and also help in economic policy-making. Originality/value This study finds the impact of stock mispricing on corporate investment decisions by considering the role of market timing in the context of Pakistan.

The long-term performance of new product introductions

Risk without strike: Nuclear crisis and corporate investment

This paper investigates the relevance of market timing considerations on the debt-equity choice using a panelof tunisian and french listed firms. Consistent with the market timing theory, we find that firms tend to issueequity when their market valuations are relatively higher than their book values and after market performanceimprovement. As a consequence, these firms become underlevraged in the short-term and this impact of equitymarket timing on capital structure persists beyond eight years.

The aim of this study is to investigate the short- and long-term impacts of economic policy uncertainty (EPU) on the corporate investment decisions of Turkish manufacturing firms listed on the Borsa Istanbul (BIST). The sample consists of 103 manufacturing firms and the data period is from 2005 Q1 to 2023 Q4. We use the global EPU (GEPU) index to proxy for uncertainty. We use panel data analysis and estimate the regression parameters using both the fixed effects model and the fixed-effect quantile regression model. Our findings indicate a negative and statistically significant impact of GEPU on corporate investment decisions. Moreover, in the long-term, this negative impact persists and continues to hold significant. The findings are in line with the predictions of the real options theory, the assumptions of which are irreversibility and forward-looking nature of investments. When firms experience a positive uncertainty shock in the investment environment, they prefer to postpone their investments or disinvest. Our findings have some major implications. First, companies should incorporate EPU into their investment decisions to time their investment activities. Second, EPU can have persistent and prolonged effects that create fluctuations in corporate investment. Third, companies should consider global economies’ EPU besides local EPU as the empirical results of this study show.

Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China

Does Mandatory Audit Firm Rotation Improve or Impair Corporate Investment Efficiency?

Introduction. According to classical postulates, by changing the key interest rate (policy rate), the central bank influences the cost of debt capital, which, in turn, is reflected in investment activity within the economy. Indirectly, the level of the key rate also determines the expected rate of return on invested equity capital. Thus, monetary policy has a significant impact on the key parameters of the discount rate and on investment decisions. In the context of escalating geopolitical risks, the scientific testing of whether this thesis holds true for developing and emerging market economies, which include Ukraine, is a relevant issue. Problem Statement. Emerging Markets and Developing Economies (EMDEs) are characterized by heightened levels of macroeconomic uncertainty and investment risks, quasi-rational behaviour of financial market participants, a significant share of the shadow economy, an insufficiently developed capital market, and so on. Under such conditions, the capacity for monetary policy to influence investment decisions may be quite limited. The vast majority of research in this area focuses on developed economies, while the impact of the key rate and market interest rates on corporate investment in EMDEs has been insufficiently studied. This creates an informational vacuum in understanding the specifics of monetary influence on less mature financial markets and complicates the selection of adequate tools for stimulating investment activity. The purpose of this study is to conduct an empirical analysis of how monetary policy instruments – particularly the policy rate – affect corporate investment activity in EMDEs through the interest rate channel. Methods. The study employs a content analysis method, as well as a range of empirical methods, including fixed-effects regression models and pooled regression techniques. Results. The empirical analysis shows that increases in the real policy rate significantly reduce investment growth in transition economies, while in developing economies, this effect is weaker and less robust. Across all country groups, economic growth remains the key driver of investment activity. Geopolitical risk acts as an important restraining factor primarily for developing economies. Overall, the findings confirm the hypothesis that higher interest rates have a negative impact on corporate investment decisions in less mature financial markets. Conclusions. The research confirms that for the corporate sector in EMDEs, the ability to adapt investment decisions to fluctuations in interest rates and macroeconomic uncertainty is critical. The suggested tools – rate fixation, diversification of funding sources, scenario analysis of WACC, real options, and stress testing – enhance the resilience of corporate finance and allow for more effective management of long-term projects in a volatile monetary environment. Prospects for further research are associated with the analysis of sectoral specificities, the role of various institutional and macro-financial factors, as well as an in-depth study of the impact of geopolitical risks on investment behaviour in developing and transition economies.