Debt maturity structure and firm investment in the financially constrained environment

Abstract

PurposeThe financial policies of the modern world corporations and their investment decisions are generally considered as interrelated because the agency problems, associated with the debt level and its maturity structure, give rise to incentives for overinvestment or underinvestment. The present study empirically investigates the linkage between debt maturity structure and firm investment in a financially constrained environment, using Pakistan as a case study, to determine how the institutional environment in which firms operate affect these decisions and their linkage.Design/methodology/approachThe empirical analysis is carried in a panel data setting using panel regression models as the baseline methods. Moreover, generalized methods of moments (GMM) estimators are used, coupled with the instrumental variables approach, for robustness and improving the efficiency and consistency of estimates.FindingsResults suggest that firms rely more on short financing in Pakistan. Thus, given the capital structure which is characterized by higher proportion of short-term financing, the higher level of leverage is less likely to cause underinvestment problem. However, the underinvestment problem do persists in the firms that have higher portion of long-term debt. These findings imply that the debt-overhang problem may persist even in the financially constrained environments where attractive investment opportunities are limited, and long-term financing is difficult to acquire.Originality/valueThis study contributes to the literature by revealing how corporate investment and financing decisions and their linkage is influenced by the institutional environment of the less developed countries which is characterized by underdeveloped financial markets, inefficient legal system and weak investor protection system.

Interest rate volatility and financing of Islamic banks

“…This indicates that corporate financing, which constitute more than 70% of the overall financing portfolio of Islamic banking industry in Pakistan, is more vulnerable to interest rate risk followed by the SMEs financing. This is because the financial managers usually opt for an optimal capital structure, determined by the cost of financing and a trade-off between tax shield benefits and bankruptcy costs associated to debt financing including the financing from banks [ 98 ]. Thus, a change in interest rate triggers changes in cost of Islamic financing which ultimately leads to changes in the demand for Islamic financing.…”

Pengaruh Struktur Jatuh Tempo Utang Dan Leverage Terhadap Investasi Perusahaan Pada Perusahaan Sektor Infrastruktur.

“…Bagaimana keputusan investasi suatu perusahaan dipengaruhi oleh tingkat utang dan struktur jatuh tempo utangnya? Pertanyaan ini adalah salah satu pertanyaan yang biasa dihadapi perusahaan dalam mengelola keuangannya (Nouman et al, 2022). Agar dapat bertahan dan menjaga kelangsungan usaha, perusahaan harus mampu bersaing dengan perusahaan lainnya.…”

“…Terdapat beberapa faktor yang mempengaruhi keputusan investasi, seperti kebijakan utang, arus kas, struktur modal, likuiditas dan lain sebagainya. Dunia nyata dengan pasar yang tidak sempurna, kebijakan keuangan dan keputusan investasi saling terkait secara signifikan karena masalah keagenan yang melekat, terkait dengan tingkat utang dan struktur jatuh temponya, menimbulkan insentif untuk investasi berlebih (overinvestment) atau kekurangan biaya untuk berinvestasi (underinvestment) (Nouman et al, 2022). Perusahaan yang lebih mengandalkan utang jangka panjang lebih rentan terhadap masalah underinvestment.…”

“…Ini karena pasar keuangan negara-negara tersebut dicirikan oleh stabilitas yang lebih rendah, inefisiensi, akses yang terbatas dan terkendali, dan kurangnya kedalaman (Shah et al, 2021). Lebih jauh lagi, hak kepemilikan yang lemah, sistem hukum yang tidak efisien, sistem perlindungan investor yang lemah, dan standar akuntansi yang kurang kuat dari negara-negara miskin memperbesar risiko keuangan yang mendasarinya (Nouman et al, 2022).…”

Investment Decisions of Energy Sector Companies on the Indonesia Stock Exchange: Theory and Evidence

“…Increasing firm value through investment decisions has been a topic of extensive research and has been the subject of debate in recent decades (Mahirun and Kushermanto, 2018;Mousa et al, 2021;Triani and Tarmidi, 2020). This is due to the increase in the role of corporate investment decision-making to maximize shareholder wealth by optimizing firm value, particularly in developing countries (Hidayat et al, 2019;Nouman et al, 2022;Salehi et al, 2022). Previous research indicates an increase in firm value through corporate social responsibility (Butt et al, 2020;Hatane et al, 2021;Dewi et al, 2021), funding decisions (Uzliawati et al, 2018;Luu, 2021;Lawson and Osaremwinda, 2019), dividend policy (Trinh et al, 2022;Ali, 2022), or other corporate actions, such as mergers and acquisitions (Gao and Bao, 2022;Wang et al, 2021), as well as stock splits (Hendra et al, 2020;Podgórski and Pasierbek, 2020).…”