Global Perspectives on Financial Policy Optimization: Addressing Overinvestment and its Impact on Corporate Profitability (Study on Indonesia Stock Exchange)
DOI:
https://doi.org/10.33506/sl.v13i2.3203Keywords:
Company Performance, Overinvestment, Debt Policy, Dividend PolicyAbstract
The primary objective of this research is to investigate the impact of overinvestment on corporate performance. It also seeks to analyze the effectiveness of debt policy, dividend policy, and the combined use of debt and dividend policy in alleviating the adverse effects of overinvestment on corporate performance. The study utilizes data from a sample of 53 non-financial companies that carried debt and consistently distributed dividends from 2010 to 2022. Overinvestment is assessed through two methods: the residual value derived from the new investment equation and the Hodrick-Prescott (HP) filter. The data is then transformed into panel data, and various models such as fixed effect, random effect, and common effect are applied to identify the most suitable model. The findings indicate a negative correlation between overinvestment and corporate performance. Debt policy emerges as a mitigating factor, addressing agency conflicts and reducing the adverse impact of overinvestment on company performance. Similarly, dividend policy proves effective in mitigating the negative effects of overinvestment by constraining excess cash. The combination of debt and dividend policies is identified as a comprehensive strategy to mitigate overinvestment, as it aids in curbing excessive free cash flow. However, it is noted that this combination also lowers financing funds to their minimum level, potentially leading to a shortage of funds for future profitable projects. Consequently, careful calculations are emphasized to ensure companies strike a balance, avoiding neglect of profitable investments in the future.
References
Abdeljawad, I., El-hafez, R. Y. A., & Abualhassan, S. A. (2022, March). The role of debt and dividends in moderating the relationship between overinvestment and financial performance: evidence from Palestine. In International Conference on Business and Technology (pp. 746-756). Cham: Springer International Publishing.
Alli, K. L., Khan, A. Q., & Ramirez, G. G. (1993). Determinants of Corporate Dividend Policy: A Factorial Analysis. Financial Review, 28(4), 523–547. https://doi.org/10.1111/j.1540-6288.1993.tb01361.x
Ayash, B. (2020). The origin, ownership and use of cash flows in leveraged buyouts. The Quarterly Review of Economics and Finance, 77, 286-295.
Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial Finance, 41(2), 126-144.
Bhuiyan, M. B. U., & Hooks, J. (2019). Cash holding and over-investment behavior in firms with problem directors. International Review of Economics and Finance, 61(January), 35–51. https://doi.org/10.1016/j.iref.2019.01.005
Brigham, E. F., & Ehrhardt, M. C. (2015). Financial Management: Theory and Practice: Fifteenth Edition (15th ed.). Cengage Learning.
Cai, J. F. (2013). Does corporate governance reduce the overinvestment of free cash flow? Empirical evidence from China. Journal of Finance and Investment Analysis, 2(3), 97-126.
Cho, E. J., Lee, J. H., & Park, J. S. (2021). The impact of leverage and overinvestment on project financing: evidence from South Korea. Asia-Pacific Journal of Accounting and Economics, 28(6), 723–745. https://doi.org/10.1080/16081625.2019.1584761
Copper, D. R., & Schinder, P. S. (2014). Business Research Methods (Twelfth ed). McGraw-Hill.
Drehmann, M., & Yetman, J. (2018). Why you should use the Hodrick-Prescott filter - at least to generate credit gaps. BIS Working Paper Series, 744. www.bis.org
Farooq, S., Ahmed, S., & Saleem, K. (2014). Impact of Overinvestment & Underinvestment on Corporate Performance: Evidence from Singapore Stock Market. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2512436
Grossman, & Hart, O. D. (2013). Corporate Financial Structure and Managerial Incentives. The Economics of Information and Uncertainty, I, 107–140. https://doi.org/10.7208/chicago/9780226555652.001.0001
Guariglia, A., & Yang, J. (2016). A balancing act : Managing fi nancial constraints and agency costs to minimize investment inef fi ciency in the Chinese market. Journal of Corporate Finance, 36, 111–130. https://doi.org/10.1016/j.jcorpfin.2015.10.006
Ha, L., Chi, D., Thi, N., & Chau, M. (2019). Overinvestment and Free Cash Flow : Empirical Evidence from Vietnamese Enterprises. 3, 84–96.
Hodrick, R. J., & Prescott, E. (1981). Post-War U.S. Business Cycles: An Empirical Investigation.
Hoffmann, P. S. (2014). Internal corporate governance mechanisms as drivers of firm value: panel data evidence for Chilean firms. Review of Managerial Science, 8(4), 575-604.
Jensen, M. C. (1986). Agency Cost Of Free Cash Flow, Corporate Finance, and Takeovers. SSRN Electronic Journal, 76(2), 323–329. https://doi.org/10.2139/ssrn.99580
Jensen, M., & Meckling, W. H. (1976). Theory of The Firm: Managerial Behavior, Agency Cost and Ownership Structure. Human Relations, 3, 305–360. https://doi.org/10.1177/0018726718812602
Jiang, J., Liu, B., & Yang, J. (2019). The impact of debt restructuring on firm investment: Evidence from China. Economic Modelling, 81(December 2018), 325–337. https://doi.org/10.1016/j.econmod.2019.05.019
Kannadhasan. Manoharan, S. A. (2011). Relationships among Business Strategy , Environmental Uncertainty and Performance of Firms operating in Transport Equipment Industry in India Relationships among Business Strategy , Environmental Uncertainty and Performance of Firms operating in Transport. December 2011, 1–16.
Kapellas, K., & Siougle, G. (2017). Financial reporting practices and investment decisions: A review of the literature. Industrial Engineering & Management, 6(04), 1-9.
Kocsis, L., & Sallay, M. W. (2018). Credit-to-GDP gap calculation using multivariate HP filter. www.econstor.eu
La Rocca, M., La Rocca, E. T., & Cariola, A. (2007). Overinvestment and underinvestment problems: determining factors, consequences and solutions. Corporate Ownership and Control, 5(1), 79–95. https://doi.org/10.22495/cocv5i1p7
Laeven, L. (2013). Corporate governance: what’s special about banks?. Annu. Rev. Financ. Econ., 5(1), 63-92.
Lang, L. H., & Litzenberger, R. H. (1989). Dividend announcements: cash flow signalling vs. free cash flow hypothesis?. Journal of financial economics, 24(1), 181-191.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Nghĩa, N. T., Khang, T. L., & Thành, N. C. (2018). How Debt and Dividend Policy Moderate The Impact of Overinvestment on Firm Performance. In The 5th IBSM International Conference on Business, Management and Accounting (pp. 473-484).
Oded, J. (2020). Payout policy, financial flexibility, and agency costs of free cash flow. Journal of Business Finance & Accounting, 47(1-2), 218-252.
Ping, Z. N., & Murapiro, A. T. (2021). Research on Dividend Policy Determinants: Evidence From Non-Financial Firms in Zimbabwe. International Journal of Information, Business and Management, 13(4), 35-46
Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11(2–3), 159–189. https://doi.org/10.1007/s11142-006-9012-1
Shima, K. (2010), “Lumpy capital adjustment and technical efficiency”, Economics Bulletin, Vol. 30, pp. 2817-2824.
Stein, J. C. (2003). Agency, information and corporate investment. Handbook of the Economics of Finance, 1, 111-165.
Sutrisno, S. (2019). Capital Structure, Business Risk and Corporate Performance (Case Study on Construction and Real Estate Sector). Perisai : Islamic Banking and Finance Journal, 3(2), 83–91. https://doi.org/10.21070/perisai.v3i2.2670
Trong, N. N., & Nguyen, C. T. (2020). Firm performance: the moderation impact of debt and dividend policies on overinvestment. Journal of Asian Business and Economic Studies, 28(1), 47–63. https://doi.org/10.1108/jabes-12-2019-0128
Tumba, A. N. B., & Murtini, U. (2021). Pengaruh Dividen, Hutang, Risiko, Liquidity, Tangibility, Company Growth, Firm Size, Dan Overinvestment Terhadap Kinerja Perusahaan. 37–48.
Wei, X., Wang, C., & Guo, Y. (2018). Does quasi-mandatory dividend rule restrain overinvestment? International Review of Economics and Finance. https://doi.org/10.1016/j.iref.2018.07.001
Zhao, L., Chau, K. Y., Tran, T. K., Sadiq, M., Xuyen, N. T. M., & Phan, T. T. H. (2022). Enhancing green economic recovery through green bonds financing and energy efficiency investments. Economic Analysis and Policy, 76, 488-501
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 SENTRALISASI
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Please find the rights and licenses in Sentralisasi. By submitting the article/manuscript of the article, the author(s) agree with this policy. No specific document sign-off is required.
1. License
The non-commercial use of the article will be governed by the Creative Commons Attribution license as currently displayed on Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
2. Author(s)' Warranties
The author warrants that the article is original, written by the stated author(s), has not been published before, contains no unlawful statements, does not infringe the rights of others, is subject to copyright that is vested exclusively in the author, and free of any third party rights, and that any necessary written permissions to quote from other sources have been obtained by the author(s).
3. User/Public Rights
Sentralisasi's spirit is to disseminate articles published are as free as possible. Under the Creative Commons license, Sentralisasi permits users to copy, distribute, display, and perform the work for non-commercial purposes only. Users will also need to attribute authors and Sentralisasi on distributing works in the journal and other media of publications. Unless otherwise stated, the authors are public entities as soon as their articles got published.
4. Rights of Authors
Authors retain all their rights to the published works, such as (but not limited to) the following rights;
- Copyright and other proprietary rights relating to the article, such as patent rights,
- The right to use the substance of the article in own future works, including lectures and books,
- The right to reproduce the article for own purposes,
- The right to self-archive the article (please read our deposit policy),
- The right to enter into separate, additional contractual arrangements for the non-exclusive distribution of the article's published version (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial publication in this journal (Sentralisasi).
5. Co-Authorship
If the article was jointly prepared by more than one author, any authors submitting the manuscript warrants that he/she has been authorized by all co-authors to be agreed on this copyright and license notice (agreement) on their behalf, and agrees to inform his/her co-authors of the terms of this policy. Sentralisasi will not be held liable for anything that may arise due to the author(s) internal dispute. Sentralisasi will only communicate with the corresponding author.
6. Royalties
Being an open accessed journal and disseminating articles for free under the Creative Commons license term mentioned, author(s) aware that Sentralisasi entitles the author(s) to no royalties or other fees.
7. Miscellaneous
Sentralisasi will publish the article (or have it published) in the journal if the article editorial process is successfully completed. Sentralisasi's editors may modify the article to a style of punctuation, spelling, capitalization, referencing, and usage that deems appropriate. The author acknowledges that the article may be published so that it will be publicly accessible and such access will be free of charge for the readers as mentioned in point 3.
