Do the macroeconomic factors influence the firm's investment decisions? A generalized method of moments (GMM) approach

Umar Farooq, Jaleel Ahmed and Shamshair Khan

International Journal of Finance & Economics, 2021, vol. 26, issue 1, 790-801

Abstract: The study checks association between the macroeconomic factors and corporate investment decision by using 10 years of data (2007–2016) of 12 Asian countries. There exist the series of studies, which discuss the firm‐level determinants of investment but very few studies have found the relationship between macroeconomic factors and corporate investment. So, with specific data set, this study is an attempt to fill this instant gap by exploring the relationship between macroeconomic factors and firm capital investment. GMM approach uses for estimation purposes. The results imply that increases in inflation rate decrease the investment due to increment in future cost of investment. Similarly, high interest rate decreases the corporate capital investment due to opportunistic options of early returns by investing in high interest income securities. The firms from high GDP growth countries carry higher investment level owing to business acceleration. However, the firms from high FDI inflow countries bear the low investment opportunities attributed to suppressed fierce competition. The countries having developed financial sector encourage their firms to invest more in banking securities instead of investing in physical long‐term investment, that is, investment in fixed assets due to professional management of funds by financial institutions and low substantial risks. Briefly, the findings of the study recommend that the corporate managers should focus on economic sensitivity while making decisions about any potential investment.

Date: 2021
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