An empirical analysis of the determinants of corporate investment decisions: Evidence from emerging market firms

Abstract

The purpose of this study is to analyse the impact of macroeconomic and financial market development on corporate investment decisions. The study adopts a dynamic panel data model using the Arellano and Bond (1991), the Difference GMM method. The findings revealed that the impact of macroeconomic and financial market development on corporate investment decisions was decidedly mixed depending on the measurement of the variables. Whilst stock market development and bank size are not significant in influencing corporate investment decisions, bond market development is significant in predicting corporate investment decisions. GDP per capita is significantly negative in predicting corporate investment decisions. Firm level factors such as past investment, profitability, firm size, growth opportunities available to firms and free cash flow are all significant in determining corporate investment decisions. The results of the study generally support existing literature on the impact of financial market development, macroeconomic variables and certain firm level factors on corporate investment decisions. The main value of this paper is to consider broad based approach to analysing the determinants of corporate investment decisions from emerging market context. © Euro Journals Publishing, Inc. 2009.