Impact of Overinvestment & Underinvestment on Corporate Performance: Evidence from Singapore Stock Market
33 Pages Posted: 22 Oct 2014
Date Written: October 20, 2014
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.
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