Most studies have focused on the relationship between external financing and firm investment, but they have not studied the impact of the financial constraint. In developing countries, external funds play an important role in firms’ growth, but internal finance is just as important. Musso and Schiavo, for example, examined the effect of a high debt load on firms’ investment. They found that the more creditworthy the firm, the higher its investment to capital ratio is likely to be.
In terms of internal funds, firm investment is negatively related to financial leverage, with a significant negative correlation. This relationship is significant for firms with a high information asymmetry and low growth. The relationship between financial leverage and firm investment does not hold for high-growth firms. But it remains important to understand the determinants of firm investment and how it can be improved. The following study looks at the effect of external financing on domestic firms. But the findings are not yet clear.
Despite the strong link between external and internal funds, small firms do not receive significantly more government or development bank funding than large firms. And while programs to increase small-firm finance are politically appealing, the reality is that they are not successful. The lack of legal and financial systems means that small firms cannot make up the difference. There are no alternatives, which means that they do not fill this gap. Ultimately, these programs are not likely to help small- and medium-sized firms improve their financial conditions.
In terms of financing, firm investment is significantly negatively related to the financial leverage of the controlling owners. This is true for publicly traded firms, but not for privately held firms. In addition to this, financial leverage is also negatively related to firm growth. This relationship is not as significant in high-growth firms. But the results are promising and should be incorporated into policy makers’ efforts to increase firm growth. They should be a part of government initiatives promoting small-firm finance.
Another factor that influences firm investment is financial leverage. For smaller firms, financial leverage is related to the size of the firm. And it is positive for larger firms. This means that firms are better able to invest in other firms. Moreover, smaller firms are more likely to receive government funding, and this can improve the domestic credit market. The more capital flows, the more credit-inadequate economies are. This means that more capital is needed to boost small-firm growth.
The effects of financial leverage on firm investment are mixed. For example, the relationship between financial leverage and firm investment is weak for high-growth firms. However, it is significant for low-growth firms. This means that it is necessary to increase debt to increase the chances of success. So, the relationship between debt and firm investment is significant. It should not be ignored. For instance, it is possible to finance a failed firm by raising money. If a company has high-growth loans, it is more likely to expand.