Validation of Investment Efficiency Models Based on Agency Theory, Information Asymmetry, Managerial Entrenchment and Firm value maximization

Subject Areas : Journal of Investment Knowledge

Vahid Taghizadeh Khanqah ¹ , younes badavar nahandi ² , Aliasgar Mottagi ³ , Houshang Taghizadeh ⁴

1 - PhD student of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran
2 - Associate Professor of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.
3 - Assistant Professor of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.
4 - Professor of Management, Tabriz Branch, Islamic Azad University, Tabriz, Iran.

Received: 2019-04-27 Accepted : 2019-06-09 Published : 2021-06-22

Keywords: Investment Efficiency, information asymmetry, managerial entrenchment, Firm value maximization, Agency theory,

Abstract :

In a complete market in which information asymmetry does not exist between managers and external investors, firms can optimally invest in profitable projects. However, when information asymmetry exists, firms may be confronted to face financing constraints and cash surplus which prevent them from undertaking profitable projects, resulting in an under and over investment. Therefore, in order to achieve an optimal investment efficiency model and detection of over and under investment, the empirical test of investment efficiency models examined in Tehran Stock Exchange. In this research, different models of investment efficiency extract and examined from different economic environments and compared with the native model presented, in order to explain their explanatory power. For this purpose, the origin and economic implications of investment efficiency are used to validate the models. A model is convenient when that consistent with financial and accounting theories. The financial reporting quality, free cash flow, financial constraints, economic value added, and firm value are issues that are tested in relation to investment efficiency models. For this purpose, 180 companies are used for the period of 2007-2017. The findings showed that free cash flows and financial constraints has a positive effect on over and under investment. The findings also suggested that the investment efficiency was positively affected by the economic value added and firm value, but this effect was not confirmed through all investment efficiency models. The results showed that the test of all hypotheses was confirmed based on native model of investment efficiency.

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