The paper discovers that high financial Leverage is significantly and negatively associated with firm investment. The paper then explains that high financial Leverage can lead to firm failure due to over-leveraging. It is further observed that the effect of high-leveraged company investment on firm investment is particularly significant for high information economy firms. The importance of fixed business credit, bank financing, bad debt, corporate debt and purchase money are discussed in detail within the paper.
Financial theorists argue that changes in bank supervision have a negative impact on firm investment because they reduce banks ability to reduce risks through hedge funds, and capital accountancy. The majority opinion of the critics is that it is unreasonable for banks to change their ways as currently they do have an effective tool, namely the ability to engage in counterparty transactions. The critics also believe that it will not be in the interest of banking unions for more regulation if there is going to be further pressure put on the bank to engage in activities that are contrary to their interests.
One of the most common views regarding the effect of the US Federal Reserve’s decision to purchase US securities is that it has had a negative impact on firm investments. The critics believe that the purchase was an inappropriate response to the crisis period and that it has been politically driven. The main concern is that this stimulus package has not been accompanied by suitable measures to control bank excess capacity and improve liquidity. The majority of the FED participants are currently operating above their optimal levels. These participants continue to engage in proprietary trading above their asset level and this approach has been confirmed to be the primary cause of the recent crisis.
Another criticism of the FED’s decision to purchase US securities is that it resulted in a concentration of risks from peripheral companies to the largest shareholders. As a result, these shareholders started pushing up firm investment risk and the overall cost of financing. In addition, the increasing complexities of financial markets made it difficult for banks to comply with the new Basel II requirements and create a safer and more liquid market for bank products like bonds and securities.
In order to overcome these problems, the European Central Bank (ECB) has established the European Supervisory Architecture (ESA). The ETA is an internationalised approach that is implemented in the European Union as well as the US, Canada and other major developed countries. The purpose of the ETA is to provide an effective solution to the problems of supervision of the banking sector. The architecture is divided into four components. The first component is to create a global visibility of the European supervision organisation and its mission, the second is to improve internal and external competition protection and the last is to enhance supervisory quality and performance within the framework of the European Union.
The last component of the ETA is aimed at providing a better platform for firms to plan their investment strategies, obtain external advice and take advantage of state-of-the-art tools and strategies for corporate finance, asset management, fiscal policy and liquidity. The last two concepts are very important for all firms because they will help them gain access to international investment resources and reduce the costs of capital deployment. In addition, they will increase the attractiveness of the European firms to investors, thereby enhancing the firm’s ability to attract new venture capital and reduce the costs of capital for those firms seeking higher yield investment opportunities. Ultimately, these strategies will contribute to the economic wellbeing of the European economy and help the Euro as a leading global investment destination.