The Underinvestment and Overinvestment Hypotheses: An Analysis Using Panel Data

24 Pages Posted: 26 Dec 2001

See all articles by Arthur Morgado

Arthur Morgado

Instituto Politecnico de Coimbra (Portugal)

Julio Pindado

University of Salamanca - Administration and Business Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2001

Abstract

In this paper we study the relationship between firm value and investment in order to test the underinvestment and overinvestment hypotheses. The results obtained, using panel data methodology as the estimation method, indicate that the abovementioned relation is quadratic, which implies that there exists an optimal level of investment. As a consequence, firms that invest less than the optimal level suffer from an underinvestment problem, while those firms that have a level of investment higher than the optimum suffer from an overinvestment problem. The aforementioned quadratic relation is maintained when firms are classified depending on their investment opportunities. Moreover, in accordance with the theory, those firms with valuable investment opportunities maintain an optimal level of investment higher than that of those whose investment opportunities are of low quality.

Keywords: underinvestment, overinvestment, investment opportunities

Suggested Citation

Morgado, Arthur J. V. and Pindado, Julio, The Underinvestment and Overinvestment Hypotheses: An Analysis Using Panel Data (December 12, 2001). Available at SSRN: https://ssrn.com/abstract=294871 or http://dx.doi.org/10.2139/ssrn.294871

Arthur J. V. Morgado

Instituto Politecnico de Coimbra (Portugal) ( email )

Coimbra, 3001-454
Portugal

Julio Pindado (Contact Author)

University of Salamanca - Administration and Business Economics ( email )

Campus Miguel de Unamuno
Salamanca, ES-37007
Spain
+34 923 294640 (Phone)
+34 923 294715 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
850
Abstract Views
3,275
rank
26,963
PlumX Metrics