CRITERIOS PARA LA ELABORACION DEL DISEÑO DE LA RUTA

One of the main objectives of the review of existing corporate finance literature is to identify some promising research ideas. In this section, we summarise four promising research ideas which are derived directly from the theoretical and empirical literature reviewed in this chapter.

The first promising research idea relates to the potential interactions that may exist among corporate investment, financing and payout decisions, as indicated in Gatchev et al.

(2010), Wang (2010) and Dhrymes and Kurz (1967). Typically, corporate decisions are examined in isolation using a single equation framework, which fails to account for the interdependence among various policy choices. Such a methodology may produce coefficient estimates that suffer from omitted variables bias, and therefore provide incomplete view of corporate behaviour. To overcome the shortcomings of single equation techniques that are

currently adopted in the existing literature, the proposed research idea is to empirically investigate the joint determinations of the three corporate decisions by modelling them within a simultaneous equations system which explicitly allows for the interactions among them. The simultaneous analysis is expected to improve our knowledge of the complex corporate decision-making processes by revealing new insights into the interdependences among the corporate decisions in practice.

The second promising research idea relates to the role played by uncertainty in corporate decision-making processes. Although uncertainty associated with a company’s future prospects appears to be a critical factor in determining the company’s investment in capital stock, the relationship between investment and uncertainty is still theoretically ambiguous and empirically inconsistent. The empirical evidence on the investment-uncertainty relationship seems sensitive to both the model specification and the uncertainty measurement. Moreover, the importance of uncertainty in companies’ financing and payout policies has not been thoroughly evaluated in the empirical literature. Consequently, the effects of uncertainty on financial decisions as well as the influence of uncertainty on investment decisions through its effects on financial choices are largely overlooked. Therefore, a promising research idea is to fill these gaps in the literature by considering uncertainty as a common factor involved in each of the decisions modelled in the simultaneous equations system, in order to comprehensively investigate aspects of corporate behaviour under uncertainty.

The third promising research idea relates to the emerging body of literature on behavioural corporate finance which asserts that managers’ psychological bias may have a substantial impact on corporate decisions. Although the theoretical framework in this emerging area has not been firmly established and the empirical evidence is relatively rare, it is plausible to hypothesise that the state of managerial confidence has the potential to explain a wide range of patterns in corporate investment, financing and payout decisions. A promising research idea, therefore, is to explore the role of managerial confidence and economic sentiment in explaining aspects of corporate behaviour by relaxing the conventional assumption that managers are fully rational. Again, the simultaneous equations system of corporate decisions provides a desirable platform for a systematic attempt to discover the effects of managerial confidence and economic sentiment on corporate behaviour.

The fourth promising research idea relates to the measurement of corporate investment in the empirical literature. Although the conflicting empirical evidence obtained from the tremendous amount of literature induces intense debates upon almost all aspects of corporate investment behaviour, the measure of corporate investment itself has received little attention. The literature review shows that the use of corporate investment to capital stock ratio as a measure of companies’ investment behaviour has become common practice in applied studies. However, different measures of investment as well as various proxies for capital stock have been used to construct the corporate investment to capital stock ratio. At least twenty versions of corporate investment to capital stock ratio have been identified in the existing literature. To

the best of our knowledge, there is no literature that provides comparison and evaluation among the various versions of corporate investment ratios which seem, at first sight, very similarly specified. Thus, we know little about how differently these investment ratios perform in empirical studies, and the extent to which the choice of measuring corporate investment influences their empirical results. A promising research idea is to fill this critical lacuna in the literature by conceptually discriminating and empirically evaluating the twenty most commonly used measures of corporate investment. Such analyses may improve our understanding of the financial information contained in different investment measures, and demonstrate whether the conflicting empirical evidence offered by the literature on corporate investment may be attributable to the differences in measuring corporate investment behaviour.

The remainder of the thesis attempts to implement these promising research ideas derived from the review of existing literature. Specifically, the first two research ideas, i.e. the simultaneity of corporate decisions and the effects of uncertainty on corporate decisions, are addressed in Chapter 3. A systematic attempt to explore the influences of managerial confidence on aspects of corporate behaviour is made in Chapter 4. The comparison and evaluation analyses of the various versions of corporate investment to capital stock ratio are carried out in Chapter 5. Chapter 6 concludes the study by proposing a number of promising ideas for future research which are drawn from both the existing literature reviewed and the findings presented in this thesis.

Appendix 2.A: Corporate investment theories and representative recent empirical evidence