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Do asymmetric information and leverage affect investment decisions?

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  • Ahmad, Muhammad Munir
  • Hunjra, Ahmed Imran
  • Taskin, Dilvin

Abstract

We investigate the impact of asymmetric information on the investment decisions of firms and analyze the effect of asymmetric information on the over-investment and under-investment of firms. Further, we examine the effect of leverage on the investment behavior of firms and check this association in the presence of asymmetric information. We extract data from DataStream of 280 non-financial firms listed at Pakistan Stock Exchange over the period of 2000 to 2018. We apply the Fixed Effect Model to analyze the data and System Generalized Method of Moments to check the robustness of the results. We find that asymmetric information negatively affects the investment decisions of firms. Due to asymmetric information investment decreases rapidly as compared to increase in investment. Further, leverage is an important determinant of investment decisions and the presence of asymmetric information increases the adverse effect of leverage on the investment of firms.

Suggested Citation

  • Ahmad, Muhammad Munir & Hunjra, Ahmed Imran & Taskin, Dilvin, 2023. "Do asymmetric information and leverage affect investment decisions?," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 337-345.
    • Handle: RePEc:eee:quaeco:v:87:y:2023:i:c:p:337-345
    DOI: 10.1016/j.qref.2021.05.001
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    More about this item

    Keywords

    Asymmetric information; Investment; Overinvestment; Underinvestment; Leverage; Non-financial firms;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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