The Under Investment and Over Investment Hypotheses: An Analysis Using Panel Data

24 Pages Posted: 20 Jun 2002

See all articles by Julio Pindado

Julio Pindado

University of Salamanca - Administration and Business Economics

Arthur Morgado

Instituto Politecnico de Coimbra (Portugal)

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.

Suggested Citation

Pindado, Julio and Morgado, Arthur J. V., The Under Investment and Over Investment Hypotheses: An Analysis Using Panel Data. EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314861 or http://dx.doi.org/10.2139/ssrn.314861

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)

Arthur J. V. Morgado

Instituto Politecnico de Coimbra (Portugal) ( email )

Coimbra, 3001-454
Portugal

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