The simultaneity of financing and investment decisions in the presence of corporate governance factors

This study investigates the interdependence between financing and investment decisions in the presence of corporate governance factors of three hundred non-financial companies listed on the Main Market of Bursa Malaysia. The sample is chosen randomly over a five-year period from 2007 to 2011. Using a panel data methodology, the regression models are derived based on the simultaneous equation modeling. Six factors of
corporate governance mechanisms are identified: family ownership, government ownership, state ownership, managerial ownership, board size and board composition. This is among the earliest studies in Malaysia to consider simultaneity of financing and investment decisions by adopting 2SLS estimation technique. The major contributions of this study are: first, financing and investment decisions must be determined simultaneously. The results show that both investment and financing have positive
impacts on each other. This positive effect is significantly stronger for firms with highgrowth
opportunities than those with low-growth opportunities. Second, government link investment companies (GLICs) affect leverage positively but affect investment opportunities negatively. For that reason, the government should monitor GLICs’ investments as firms controlled by GLICs have lower investment opportunities. This is especially true for low-growth firms. In contrast to GLICs, state ownership leads to higher investment opportunities especially for low growth firms. Third, managers of high-growth firms are doing their job more effectively compared to those of low growthfirms in making investment decision. Fourth, independent directors do not play a
significant role regarding investment policy especially for low growth firms. Finally,
since profitability is significant for all financing models, the finding of this study supports pecking order theory