Abstract:
This study examines the potential interaction of a firm’s financing and
investment decisions. It studies broadly how firms manage underinvestment and
liquidity risks. To estimate the effects of these decisions, the study has
incorporated four simultaneous equations using the partial dynamic adjustment
model. Panel data of non-financial Pakistani firms have been used in this study.
The findings of this study demonstrate that Pakistani high growth firms depend
on high-leverage strategies and give greater importance to underinvestment risk
rather than liquidity risk. Furthermore, growing Pakistani firms are not
adopting low-leverage strategies ex ante to participate in future growth
opportunities ex post. This study also examines whether or not Pakistani firms
are paying special attention to the mixing of debt maturity that affects the firm’s
investment decisions and its value.
