Determinants of Investment Decisions in Tech Firms: Evidence from GMM Analysis of Panel Data Across 23 OECD Countries
Alexeeva-Alexeev I.

Alexeeva-Alexeev, Inna. (2024) “Determinants of Investment Decisions in Tech Firms: Evidence from GMM Analysis of Panel Data Across 23 OECD Countries.” The Problems of Economy 4:4–14.
https://doi.org/10.32983/2222-0712-2024-4-4-14

Section: World economy and international relations

UDC 336.22

Abstract:
Corporate investment decision has been a recurrent topic in literature for the last decades. However, there is little studied about what internal and external factors influence this decision in the companies of the Information and Communication Technologies (ICT) sector, so important for technological development of business and economies. The objective of this empirical study is to analyze the impact generated by firm- and country-level variables on the investment decision-making by technological firms. The analysis, made with GMM of two steps of 19,613 observations obtained from 1,661 listed ICT companies in 23 OECD countries between 2003 and 2019. The data were obtained through various databases, such as S&P Capital IQ, World Bank's World Development Indicators, International Monetary Fund statistics and the OECD's Main Science and Technology Indicators (MSTI). The results of the study suggest that corporate investments of tech firms highly depend on internal and external financing. There are other interesting findings showing significant impact generated by other firm- and country-level variables both in ICT manufacturing and services subsectors.

Keywords: ICT sector, technological firms, fixed investments, cash flow, leverage, OECD, two-step GMM, data panel.

Tabl.: 4. Formulae: 2. Bibl.: 79.

Alexeeva-Alexeev Inna – Doctor of Sciences (Economics), Associate Professor, Department of Business Organization, University of Cantabria (56 De los Castros Ave., Santander, Cantabria, 39005, Spain)
Email: alexeevai@unican.es

List of references in article

Arguedas, R., and Gonzalez, J. Finanzas empresariales. Ramon Areces, 2016.
Minerva, R., and Crespi, N. “Digital twins: Properties, software frameworks, and application scenarios“. IT professional, vol. 23 (1) (2021): 51-55.
Smith, R., and Sharif, N. “Understanding and acquiring technology assets for global competition“. Technovation, vol. 27 (2007): 643-649.
Mina, A., Lahr, H., and Hughes, A. “The demand and supply of external finance for innovative firms“. Industrial and Corporate Change, vol. 22 (4) (2013): 869-901.
Koutroumpis, P., Leiponen, A., and Thomas, L. D. “The Young, the Old and the Innovative: The Impact of R&D on Firm Performance in ICT versus Other Sectors“. 2017. https://www.etla.fi/wp-content/uploads/ETLA-Working-Papers-51.pdf
Beneito, P., Rochina-Barrachina, M. E., and Sanchis-Llopis, A. “Ownership and the cyclicality of firms' R&D investment“. International entrepreneurship and management Journal, vol. 11 (2) (2015): 343-359.
Brown, J. R., and Petersen, B. C. “Which investments do firms protect? Liquidity management and real adjustments when access to finance falls sharply“. Journal of Financial Intermediation, vol. 24 (4) (2015): 441-465.
Hyytinen, A., and Pajarinen, M. “Financing of technology-intensive small businesses: Some evidence on the uniqueness of the ICT sector“. ETLA Discussion Papers, no. 813 (2022).
Modigliani, F., and Miller, M. “The Cost of Capital, Corporation Finance and the Theory of Investment“. American Economic Review, vol. 48 (3) (1958): 261-297.
Ardalan, K. “Capital structure theory: Reconsidered“. Research in International Business and Finance, vol. 39 (2017): 696-710.
Mari, C., and Marra, M. “Valuing Firms Under Default Risk and Bankruptcy Costs: A WACC-Based Approach“. International Journal of Business, vol. 23 (2) (2018): 111-130.
Chod, J. “Agency Cost of Debt: A Case for Supplier Financing“. Foundations and Trends® in Technology, Information and Operations Management, vol. 10 (3-4) (2017): 220-236.
Ferracuti, E., and Stubben, S. R. “The role of financial reporting in resolving uncertainty about corporate investment opportunities“. Journal of Accounting and Economics, vol. 68 (2-3) (2019): 101248.
Frank, M. Z., and Goyal, V. K. “Trade off and pecking order theories of debt“. Handbook of corporate finance: Empirical corporate finance, vol. 2 (2008): 135-202.
Brusov, P. et al. “Bankruptcy of the Famous Trade-Off Theory“. Modern Corporate Finance, Investments and Taxation (2015): 47-72.
Jensen, M. C., and Meckling, W. H. “Theory of the firm: Managerial behavior, agency costs and ownership structure“. Journal of Financial Economics, vol. 3 (4) (1976): 305-360.
Martin, G. P., Wiseman, R. M., and Gomez-Mejia, L. R. “Bridging finance and behavioral scholarship on agent risk sharing and risk taking“. Academy of Management Perspectives, vol. 30 (4) (2016): 349-368.
Cuevas-Rodriguez, G., Gomez-Mejia, L. R., and Wiseman, R. M. “Has agency theory run its course? Making the theory more flexible to inform the management of reward systems“. Corporate Governance: An International Review, vol. 20 (6) (2012): 526-546.
Pindado, J., Requejo, I., and de la Torre, C. “Family control and investment-cash flow sensitivity: Empirical evidence from the Euro zone“. Journal of Corporate Finance, vol. 17 (5) (2011): 1389-1409.
Glover, B., and Levine, O. “Uncertainty, investment, and managerial incentives“. Journal of Monetary Economics, vol. 69 (2015): 121-137.
Bendickson, J. et al. “Agency theory: background and epistemology“. Journal of Management History, vol. 22 (4) (2016): 437-449.
Wirtz, P. “Beyond agency theory: value creation and the role of cognition in the relationship between entrepreneurs and venture capitalists“. Advances in entrepreneurial finance (2011): 31-43.
Myers, S. “The Capital Structure Puzzle“. The Journal of Finance, vol. 39 (3) (1984): 575-592.
Myers, S., and Majluf, N. “Corporate financing and investment decisions when firms have information that investors do not have“. Journal of Financial Economics, vol. 13 (1984): 187-221.
Almeida, H., Campello, M., and Weisbach, M. S. “Corporate financial and investment policies when future financing is not frictionless“. Journal of Corporate Finance, vol. 17 (3) (2011): 675-693.
Drobetz, W., Gruninger, M. C., and Hirschvogl, S. “Information asymmetry and the value of cash“. Journal of banking & finance, vol. 34 (9) (2010): 2168-2184.
Ozkan, A., and Ozkan, N. “Corporate Cash Holdings: An Empirical Investigation of UK Companies“. SSRN Electronic Journal, no. 28(9) (2004): 2103-2134. DOI:10.1016/j.jbankfin.2003.08.003
Core, J. E. “A review of the empirical disclosure literature: discussion“. Journal of accounting and economics, vol. 31 (1-3) (2001): 441-456.
Fosu, S. et al. “Information asymmetry, leverage and firm value: Do crisis and growth matter?“ International Review of Financial Analysis, no. 46 (2016): 140-150.
Brealey, R., and Myers, S. Principios de finanzas corporativas. McGraw Hill, 2003.
Hotchkiss, E. S. et al. “Bankruptcy and the resolution of financial distress“. Handbook of empirical corporate finance (2008): 235-287. DOI: https://dx.doi.org/10.2139/ssrn.1086942
Bhabra, G. S., and Yao, Y. “Is bankruptcy costly? Recent evidence on the magnitude and determinants of indirect bankruptcy costs“. Journal of Applied Finance and Banking, vol. 1 (2) (2011): 39-68.
Epaulard, A., and Zapha, C. “Bankruptcy costs and the design of preventive restructuring procedures“. Journal of Economic Behavior & Organization, no. 196 (2022): 229-250.
Mauer, D. C., and Sarkar, S. “Real options, agency conflicts, and optimal capital structure“. Journal of banking & Finance, vol. 29 (6) (2005): 1405-1428.
Garcia, M. T. “Liquidez, costes financieros e inversion de las empresas espanolas: un analisis empirico“. Revista Espanola de Economia, vol. 15 (3) (1998): 463-486.
Nini, G., Smith, D. C., and Sufi, A. “Creditor control rights, corporate governance, and firm value“The Review of Financial Studies vol. 25 (6) (2012): 1713-1761.
Harford, J., Mansi, S. A., and Maxwell, W. F. “Corporate governance and firm cash holdings in the US“. Journal of financial economics, vol. 87 (3) (2008): 535-555.
Morgado, A., and Pindado, J. “The underinvestment and overinvestment hypotheses: an analysis using panel data“. European Financial Management, vol. 9 (2) (2003): 163-177.
Lozano, M. B. “Analysing the effect of excess cash accumulation on financial decisions“. Applied Economics, vol. 44 (21) (2011): 2687-2698.
Villamil, A. P. “The Modigliani-Miller Theorem“. The New Palgrave Dictionary of Economics, no. 6 (2008): 1-7.
Graham, J. R. “Taxes and corporate finance“. Handbook of empirical corporate finance, vol. 2 (2008): 59-133.
Bose, D. C. Fundamentals of Financial management. PHI Learning Pvt. Ltd., 2011.
Erosa, A., and Gonzalez, B. “Taxation and the life cycle of firms“. Journal of Monetary Economics, no. 105 (2019): 114-130.
Dobbins, L., and Jacob, M. “Do corporate tax cuts increase investments?“ Accounting and Business Research, vol. 46 (7) (2016): 731-759.
Djankov, S. et al. “The effect of corporate taxes on investment and entrepreneurship“. American Economic Journal: Macroeconomics, vol. 2 (3) (2010): 31-64.
Fazzari, S., Ferri, P., and Greenberg, E. “Cash flow, investment, and Keynes-Minsky cycles“. Journal of Economic Behavior & Organization, vol. 65 (3-4) (2008): 555-572.
Bolton, P., Chen, H., and Wang, N. “A unified theory of Tobin's q, corporate investment, financing, and risk management“. The Journal of Finance, vol. 66 (5) (2011): 1545-1578.
Kaplan, S. N., and Zingales, L. “Do investment-cash flow sensitivities provide useful measures of financing constraints?“ The Quarterly Journal of Economics, vol. 112 (1) (1997): 169-215.
Ascioglu, A., Hegde, S. P., and McDermott, J. B. “Information asymmetry and investment-cash flow sensitivity“. Journal of Banking y Finance, vol. 32 (6) (2008): 1036-1048.
Lopez-Gracia, J., and Sogorb-Mira, F. “Testing trade-off and pecking order theories financing SMEs“. Small Business Economics, vol. 31 (2) (2008): 117-136.
Love, I. “Financial development and financing constraints: International evidence from the structural investment model“. The Review of Financial Studies, no. 16 (2003): 765-791.
Dadashi, A., Pakmaram, A., and al-Din, M. M. “Investigating Effect of Oil Prices on Firm Value with Emphasis on Industry Type“. International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5 (1) (2015): 109-129.
Kenney, M. “Explaining the growth and globalization of Silicon Valley: the past and today“. Berkeley Roundtable on the International Economy (BRIE), Working Paper, 1 (2017).
Bardhan, I., Krishnan, V., and Lin, S. “Research note - Business value of information technology: Testing the interaction effect of IT and R&D on Tobin's Q“. Information Systems Research, vol. 24 (4) (2013): 1147-1161.
Vanacker, T. R., and Manigart, S. “Pecking order and debt capacity considerations for high-growth companies seeking financing“. Small Business Economics, vol. 35 (1) (2010): 53-69.
Sajid, M., Mahmood, A., and Sabir, H. M. “Does financial leverage influence investment decisions? Empirical evidence from KSE-30 index of Pakistan“. Asian Journal of Economic Modelling, vol. 4 (2) (2016): 82-89.
Ozdagli, A. K. “Financial leverage, corporate investment, and stock returns“. Review of Financial Studies, vol. 25 (4) (2012): 1033-1069.
Proano, C. R., Schoder, C., and Semmler, W. “Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions“. Journal of International Money and Finance, no. 45 (2014): 17-37.
Czarnitzki, D., and Hottenrott, H. “R&D investment and financing constraints of small and medium-sized firms“. Small business economics, no. 36 (2011): 65-83.
Bakke, T. E., and Whited, T. M. “Which firms follow the market? An analysis of corporate investment decisions“. The Review of Financial Studies, vol. 23 (5) (2010): 1941-1980.
Aoun, D., and Hwang, J. “The effects of cash flow and size on the investment decisions of ICT firms: A dynamic approach“. Information economics and policy, vol. 20 (2) (2008): 120-134.
Canarella, G., and Miller, S. M. “The determinants of growth in the US information and communication technology (ICT) industry: A firm-level analysis“. Economic Modelling, no. 70 (2018): 259-271.
Sridhar, S., Narayanan, S., and Srinivasan, R. “Dynamic relationships among R&D, advertising, inventory and firm performance“. Journal of the Academy of Marketing Science, no. 42 (2014): 277-290.
Brown, J. R., and Petersen, B. C. “Which investments do firms protect? Liquidity management and real adjustments when access to finance falls sharply“. Journal of Financial Intermediation, vol. 24 (4) (2015): 441-465.
Van den Bergh, J. C. “The GDP paradox“. Journal of Economic Psychology, vol. 30 (2) (2009): 117-135.
Agosin, M. R., and Machado, R. “Foreign investment in developing countries: does it crowd in domestic investment?“ Oxford Development Studies, vol. 33 (2) (2005): 149-162.
Dudley, E. “Capital structure and large investment projects“. Journal of Corporate Finance, vol. 18 (5) (2012): 1168-1192.
Dobbins, L., and Jacob, M. “Do corporate tax cuts increase investments?“ Accounting and Business Research, vol. 46 (7) (2016): 731-759.
Brown, J. R., Fazzari, S. M., and Petersen, B. C. “Financing innovation and growth: Cash flow, external equity, and the 1990s R&D boom“. The Journal of Finance, vol. 64 (1) (2009): 151-185.
Fazzari, S., Ferri, P., and Greenberg, E. “Aggregate demand and firm behavior: a new perspective on Keynesian microfoundations“. Journal of Post Keynesian Economics, vol. 20 (4) (1998): 527-558.
De Miguel, A., and Pindado, J. “Determinants of capital structure: new evidence from Spanish panel data“. Journal of Corporate Finance, vol. 7 (1) (2001): 77-99.
Lang, L. H., Stulz, R., and Walkling, R. A. “A test of the free cash flow hypothesis: The case of bidder returns“. Journal of Financial Economics, vol. 29 (2) (1991): 315-335.
Pindado, J., Rodrigues, L., and De La Torre, C. “How do insolvency codes affect a firm's investment?“ International Review Law Economics, vol. 28 (4) (2008): 227-238.
Aivazian, V. A., Ge, Y., and Qiu, J. “The impact of leverage on firm investment: Canadian evidence“. Journal of corporate finance, vol. 11 (1) (2005): 277-291.
Kestens, K., Van Cauwenberge, P., and Bauwhede, H. V. “Trade credit and company performance during the 2008 financial crisis“. Accounting & Finance, vol. 52 (4) (2012): 1125-1151.
Arellano, M., and Bover, O. “Another look at the instrumental variable estimation of error-components models“. Journal of Econometrics, vol. 68 (1) (1995): 29-51.
Blundell, R., and Bond, S. “Initial conditions and moment restrictions in dynamic panel data models“. Journal of Econometrics, vol. 87 (1) (1998): 115-143.
Huynh, K. P., and Petrunia, R. J. “Age effects, leverage and firm growth“. Journal of Economic Dynamics and Control, vol. 34 (5) (2010): 1003-1013.
Beil, R. O., Ford, G. S., and Jackson, J. D. “On the relationship between telecommunications investment and economic growth in the United States“. International Economic Journal, vol. 19 (1) (2005): 3-9.