The Underinvestment and Overinvestment Hypotheses: An Analysis Using Panel Data

Posted: 24 Sep 2003

See all articles by Arthur Morgado

Arthur Morgado

Instituto Politecnico de Coimbra (Portugal)

Julio Pindado

University of Salamanca - Administration and Business Economics

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Abstract

We study the relationship between firm value and investment 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 investing more than the optimum suffer from overinvestment. The quadratic relation is maintained when firms are classified depending on their investment opportunities, the optimum being in accordance with the quality of investment opportunities.

JEL Classification: G31

Suggested Citation

Morgado, Arthur J. V. and Pindado, Julio, The Underinvestment and Overinvestment Hypotheses: An Analysis Using Panel Data. European Financial Management, Vol. 9, No. 2, June 2003. Available at SSRN: https://ssrn.com/abstract=430100

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)

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