Financing constraints and corporate investment decision: evidence from an emerging economy

Abstract

Purpose Existing theories on the determining factors of corporate investment decisions raise the importance of financial market imperfections in explaining investment behavior. Many factors have been proposed as drivers of investment, mainly in developed economies, while emerging countries have almost been neglected. The main purpose of this study is to examine the effect of financing constraints on the investment behavior of a small context, namely, Jordan, with an imperfect environment. Design/methodology/approach This study considers panel data regressions from the industrial companies traded at the Amman Stock Exchange with a total of 1,058 firm-year observations. Findings The results are able to demonstrate that business size, tangibility, market-to-book ratio, profitability, financial slack and leverage are major drivers of investment choices. The results support the importance of information asymmetry in explaining the investment behavior of firms. Nonetheless, the Q-theory is in place, as is firm agility. Practical implications Policies to reduce information asymmetry are immediately needed to help firms increase investments by providing them with access to training, technology and market information. They also should enhance the firms’ opportunities for growth. Moreover, they should make it easier for businesses to access financial slack, such as by improving access to credit and financial institutions. They also can work to improve the financial infrastructure to meet the financing needs of businesses. Finally, smaller businesses should be assisted by improving their ability to invest and grow. Originality/value To the best of the authors’ knowledge, this is one of the first studies, if any, to investigate this issue in a distinct environment. Despite the unique characteristics of Jordan, the findings are applicable to other countries that experience comparable political and economic circumstances because Jordan has traits common to many emerging nations.

Capital structure and public corruption among non-financial firms in the MENA region: The impact of the Arab spring

“…This choice is prioritized if non-debt tax shields (e.g., depreciation charges) are large enough to lower the tax burden [ 47 ]. The MENA financial markets are still undeveloped, and smaller companies have greater costs of external capital than larger companies, as they are subject to additional information asymmetry problems [ 46 ]; in addition, the unpredictable investment climate encourages large corporations to use retained earnings [ 48 ]. Supporting the view of the most studies, we anticipate bigger enterprises to be more indebted.…”