The relationship between corporate investment decision and firm performance: Moderating role of cash flows

• Published date: 01 May 2022
• Author: Muhammad Saif Ul Islam,Muhammad Saeed Meo,Muhammad Usman
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2445

ACADEMIC PAPER

The relationship between corporate investment decision and

firm performance: Moderating role of cash flows

Muhammad Saif Ul Islam

1

| Muhammad Saeed Meo

2

| Muhammad Usman

3

1

School of Economics, Finance & Banking,

University Utara Malaysia, Sintok, Malaysia

2

MS Department, The Superior College Lahore

Pakistan, Lahore, Pakistan

3

Hailey College of Commerce, University of

the Punjab, Lahore, Pakistan

Correspondence

Muhammad Saif Ul Islam, School of

Economics, Finance & Banking, University

Utara Malaysia, Bukit Kayu Hitam, Sintok,

Kedah 06010, Malaysia.

Email: saifyislamhcc@gmail.com

This study examines relationship between corporate investment decision and firm

performance with the moderating role of cash flows. The sample of this study is con-

sisting of 68 nonfinancial companies and data are gathered from companies audited

annual reports and business recorder websites for 2013–2017. Simple multiple

regression and moderated regression analysis are used to achieve objectives of the

study. The overall findings of the study show that corporate investment decisions

significantly influence the performance of the company. Moreover, the results of the

overall moderated regression show that cash flows significantly but negatively mod-

erate the relationship between corporate investment decisions and performance of

the company. The study results reveal that investment decisions have a greater sig-

nificant effect on accounting base performance rather than market base

performance.

1|INTRODUCTION

The corporate sector contributes significantly to the country's eco-

nomic growth. For example, the industrial sector accounts for 20.88%

of GDP conferring to the Economic Survey of Pakistan. The

manufacturing industry is the core of Pakistan's economy. It also is

the second-largest economic sector, contributing 13.5% of GDP.

Moreover, generating a major quantity of industrial occupations by

moving technology. According to Pakistan Bureau of Statistics (PBS),

industry-specific information shows the highest growth of iron and

steel products by 16.58%, followed by electronics as 15.24%, automo-

biles as 11.31%, food, beverages, and tobacco as 9.65%, pharmaceuti-

cals as 8.74%, nonmetallic mineral products as 7.11%, fertilizers as

1.32%, and textile as 0.78%. Some sectors showing a decline, includ-

ing wood product as −95.04% and Chemicals as −2.20%. Therefore, if

companies want to compete in the international market, they should

make huge capital investments in technologies, infrastructure, and

research and development. Such developments need huge investment

in both assets such as tangible and intangible assets (Sajid,

Mahmood, & Sabir, 2016). Such investments improve the productivity

and efficiency of companies.

Historically, the concept of investment decisions is based on the

work of Modigliani and Miller (1958) separately set forth the principle

of investment separation, the theorem of the irrelevance of capital

structure and the theorem of the irrelevance of dividends. The propo-

sitions of Modigliani–Miller show that internal and external resources

are the best alternatives for a company operating in a perfect market.

However, the optimum level of investment of the company would be

determined through its real decision (also called nonfinancial deci-

sions) which is completely independent of its financial decision. There-

fore, financial and real (nonfinancial) decisions should be made via

managers. The real decisions concern the optimal level of investment

while financial decisions concern how the anticipated investment can

be financed. While making an investment decision, companies have to

face some financing issues such as limited access to debt financing. To

resolve financing issues companies, seek investing opportunities. Cor-

porate investment is funded through internal funds and external

funds. Internal funds include retained earnings, depreciation provision,

and accumulated profits in the form of reserves. On the other hand,

external funds consist of debt and equity (Jangli & Kumar, 2010).

Modigliani and Miller (1958) claim that the financial position of a

company does not influence its market value and hence is worthless

under perfect capital markets for real investment decisions. Neverthe-

less, the theorem of irrelevance does not apply if the presumption of

perfect markets is not valid. Furthermore, most companies continue

to use internal instruments to fund investment as internal financing is

cheaper than external funds in the face of imperfect capital markets.

As external finance, managers are subject to capital market discipline,

Received: 17 July 2020 Revised: 17 August 2020 Accepted: 25 August 2020

DOI: 10.1002/pa.2445

J Public Affairs. 2022;22:e2445. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of10

https://doi.org/10.1002/pa.2445