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Impact of Overinvestment & Underinvestment on Corporate Performance: Evidence from Singapore Stock Market

33 Pages Posted: 22 Oct 2014  

Sanaullah Farooq

Auckland University of Technology - Department of Finance; Lappeenranta University of Technology (LUT) - LUT School of Business

Sheraz Ahmed

LUT School of Business; Hanken School of Economics - Department of Finance and Statistics

Kashif Saleem

Lappeenranta University of Technology - School of Business (LSB)

Date Written: October 20, 2014

Abstract

This paper aims to study the extent of overinvestment, underinvestment problem and measure its impact on corporate performance. Our sample consists of 7 years data (2005 to 2011) of 360 non-financial companies listed in the Singapore Stock Market. After panel data models appropriation tests (LM test, Hausman test, No Fixed effect test) we employed fixed effect regression methodology in our analysis. Our results show that 52% firms in our sample are engaged in proper investment projects, 29% firms are overinvesting, while 19% firms are underinvesting. Maximum overinvestment is taking place in Basic Material sector while maximum underinvestment happening in Healthcare sector. Further tests show that both overinvestment and underinvestment shows severe negative impact on firm performance. However, proper investment has positive impact on firm performance in Singapore Stock Market. The results highlight the extent of agency problem in Singapore Stock Market. Moreover, it depicts the importance of investment activities of Singaporean companies for the international investors and portfolio managers.

Keywords: Overinvestment, Underinvestment, Corporate Performance, Agency Problem, Singapore.

Suggested Citation

Farooq, Sanaullah and Ahmed, Sheraz and Saleem, Kashif, Impact of Overinvestment & Underinvestment on Corporate Performance: Evidence from Singapore Stock Market (October 20, 2014). Available at SSRN: https://ssrn.com/abstract=2512436 or http://dx.doi.org/10.2139/ssrn.2512436

Sanaullah Farooq

Auckland University of Technology - Department of Finance ( email )

42 Wakefield street
WF Building
Auckland, 1010
New Zealand

Lappeenranta University of Technology (LUT) - LUT School of Business ( email )

P.O. Box 20, 53851
Lappeenranta, 53851
Finland

Sheraz Ahmed

LUT School of Business ( email )

Skinnarilankatu 34
Lappeenranta, 53851
Finland
+35856217270 (Phone)
+35856217299 (Fax)

HOME PAGE: http://www.lut.fi/en/business/Pages/Default.aspx

Hanken School of Economics - Department of Finance and Statistics ( email )

Arkadiankatu 22
Helsinki, 00101
Finland
+358(0)415014501 (Phone)
+358(0)943133393 (Fax)

HOME PAGE: http://www.hanken.fi/staff/sheraz/

Kashif Saleem (Contact Author)

Lappeenranta University of Technology - School of Business (LSB) ( email )

Department of Finance
PO Box 20
Lappeenranta, 53851
Finland
+358 5 621 7284 (Phone)

HOME PAGE: http://www.lut.fi/kati/staff.php?start=0&id=329

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