Vaasan yliopiston opinnäytteet

Kauppatieteellinen tiedekunta, 2016

Bengs, Anders Vilhelm

Does the ‘fitness’ of a firm affect its investment behavior? Evidence from German market

Ohjaaja/Valvoja (DI):
Jussi Nikkinen
Kauppatieteiden maisteri
Laskentatoimi ja rahoitus
Master's Degree Programme in Finance
Tutkielman kieli:
This thesis examines the evolutionary firm-level investment theory. The theory states that firm behavior is not driven by profit maximization in an equilibrium economy. Rather, the economy is a dynamic environment, where firms strive to survive and grow. Firms which encompass vital skills will grow and overtake larger market shares, while weaker firms deteriorate and, eventually, exit the market.

The purpose of this study is to empirically examine if ‘fitter’ firms invest more compared to ‘weaker’ firms. Three measures of firm ‘fitness’ is used, industry adjusted cash flow, return on investment and return on assets and two measures of investment, capital expenditures and research & development expenses. The data covers eleven years of observations spanning from 2004 to 2014 and consists of listed German firms. The full sample is divided into three subsamples: Pre-crisis, crisis and post-crisis period in order to examine the effects of a business cycle. The most reliable results are obtained from the full sample and by using capital expenditures as the dependent variable. The results in this sample are convincing; firms which belong to the upper quartile, measured by the three proxies of fitness, seem to invest more compared to firms belonging to the lowest quartile.

The results of the full and subsamples regressed on R&D expenditures are peculiar. These findings are contradictory to findings, where capital expenditures is used as the dependent variable. A plausible explanation to this phenomenon may rest on insufficient observations in regards to reliable results. Thus, a knowledge gap for future research is left open, both for examining the effects of firm-level R&D behavior and, especially, how the evolutionary theory fits small firms.
Evolutionary theory, firm-level investment, financial constraints, capital heterogeneity.
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