Recent theoretical work on firm growth has revealed that firms that obtain significant economic leverage are able to overcome market fluctuations and increase their overall profits. Drawing lessons from firm-buyer theory, this paper explores how financial Leverage and Firm Investment impacts firm growth. Specifically, it is shown that financial leveraging is negatively and significantly correlated with firm growth, particularly for high data asymmetric firms.
With respect to the analysis of firm investment, it is found that firms with higher levels of human capital are more successful. More specifically, it is revealed that firms with human capital have both lower costs of capital and higher returns on capital. Conversely, firms with lower levels of human capital experience a reduction in firm investment and higher cost of capital. The results imply that firms with human capital invest more of their surplus cash into fixed assets. In addition, the research suggests that firms with human capital do not use firm expansion as a form of income.
To conclude, the present research suggests that firms should not only look at Firm Investment in terms of returns, but also in terms of inputs. To this end, firms need to provide formal job training for current and future managers. This will allow managers to understand how important it is to manage firm investments effectively, and will help firms to avoid costly mistakes.
According to the Hypothesis, misvaluation-induced errors occur when firms make inappropriate use of leverage. To test this hypothesis, the present study conducted a five-year prospective study examining 4th Circuit, Federal Circuit, and state court cases. The analysis found that excessive leverage is a cause of institutional misvaluation, with firms unnecessarily leveraging financial resources on projects that are not productive. Also, it is found that over-leveraged firms experience an increase in net operating mispricing, with the cost of firm misvaluation increasing over time.
According to the Hypothesis, if firms follow appropriately the steps laid out in the Financial Model, then firm investments will be safe from misvaluation. To test this hypothesis, researchers examined the relationship between four factors related to Leveraging, namely: total investment capital, firm size, level of financial risk, and geographic area. Analysis showed that, overall, misvaluation-induced errors occurred at the site where total investment capital was the largest. In addition, researchers found that the effects of geographic area on firm mis valuation were strongest for those firms operating in urban areas. In addition, researchers found that firm size and level of risk were unrelated to the degree of misvaluation, suggesting that firm size does not directly influence the risk that a firm exposes itself to. Finally, researchers discovered no significant relationship between firm size and the misvaluation-induced exit of ten largest firms.
Overall, in line with the Hypothesis, if firms follow the investment strategy outlined in the Financial Model, then investment success will be more likely. However, given the present-day economic climate and current investments practices, investors may need to evaluate whether current investment strategy are still relevant. If no significant changes are made, it could lead to the continuation of high level of investment risk. To date, few alternative investment strategies have been developed to replace the failed strategies in the financial industry. It is believed that a better analysis and monitoring of today’s investment strategies can help investors and institutions find the most appropriate investment opportunities.