Firm investment refers to the total value of all assets owned by a company as of a specific date. The total value is determined by applying a multiple regression analysis to the historical data. regression is a well known statistical method used to estimate the relationship between a variable and its mean and standard deviation. It basically uses the information obtained from many other measurements to form a statistical concept called the regression equation. This equation can be used to calculate the expected value of firm wealth at a future time.
According to the study of firm investment, firms in early development stage are much more vulnerable to financial leveragedness than those which are already in mid or late maturity stage. This is due to the fact that new firms are capitalized with limited resources – equity, assets, fixed capital and operating funds. The study also shows that such firms are much exposed to financial leveraging than those which are in late maturity or growth stage. This is because new firms are capitalized with very limited resources – equity, fixed capital, operating funds and short term debt. As a result, they find it increasingly difficult to obtain external financing. However, the role of banks in the finance industry can not be ignored in this equation as banks provide credit lines and loans at relatively higher interest rates and bigger down payment.
While such investments can boost employment and improve living standards for common man, they are not without risks. The failure of such firms could adversely affect overall economic performance. Hence, it is important to address the problems of inefficient investments through the use of fiscal policy, the exercise of fiscal stimulus package, by the central government, local governments and the private sector through fiscal policy frameworks and mechanisms, and by using tools and strategies that help tackle the financing, allocation and liquidity challenges faced by firms.
However, such policies and measures may not address the real cause of poor investment efficiency. The key reason is the absence of a supportive set of institutional and structural reforms that would make the process of optimal investment management easier. It is only after such changes are brought about that governments, central banks, local governments, the FIs and the market players will be able to tackle the adverse effects of market friction, excessive leverage, excessive losses and the inability of firms to effectively manage their exposures.
Only such structural reforms can help address the negative aspects of firm investment. However, due to the complexity of the reforms that have to be brought about, only a comprehensive plan backed by a sound strategy can help bring about significant changes in the manner of working of the financial sector. It is this very plan, along with an appropriate fiscal policy, and the use of the stimulus package to stimulate the economy, which is the key to effective fiscal restraint. In other words, it is the combination of fiscal stimulus package, market regulation reform, and reforms that have to be brought about in order to make the financial crisis that much more manageable for all.
Financial firms are still working on bringing about such structural reforms. If you have been thinking of making huge profits from your firm investments, then you are probably being encouraged by the current climate of market. It is only a matter of time before the recession period ends and all investors pull up their socks as all hell breaks loose. Only such government intervention can stop the bleeding and bring back normal levels of investment confidence.