Factors Affecting Strategic Investment Decision-Making and Their Impact on Corporate Financial Performance

 

Factors Affecting Strategic Investment Decision-Making and Their Impact on Corporate Financial Performance

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Are different factors affecting strategic investing decision-making have impact on firms’ financial performance in the Pakistani context?

3. Data and Methodology

3.1 Sampling procedure

A survey was conducted in Pakistani listed manufacturing companies during March–June 2018. The survey was conducted via personal visits to companies’ head offices, and email invitation request was sent. The total of 190 companies was approached from 142 companies responded from which 128 were valid responses. So, the response rate was 67.36%. All the participants were directly engaged in the strategic decision-making process. As were on key posts of the companies, like Chief Financial Officer (CFO), General Manager (GM), Management Accountant (MA), Accounts Manager (AM), and Finance Manager (FM). Further, an analysis was made about the financial performance indicators based on financial statement data; change figures were obtained from 2017 and 2018. Data related gross revenue variations, Net profit fluctuations, equity changes, and overall asset changes were taken from annual reports of the companies. Finally, to view the market changes, the stock market price change from July 2017 to September 2019 was taken as a key variable.

Respondents answered the questions in the survey questionnaire using the likert scale values from 1 to 5 (1 = strongly disagree to 5 = strongly agree). The survey data were first analyzed by using the SPSS 24 for correlation, but also for exploratory factor analysis (EFA) used to find out the factors affecting Strategic investment decision-making.

3.2 Theoretical underpinnings

Strategy
Middle Management
Financial Analysis
Top Management
Net Profit Growth Rate
Total Assets Growth Rate
Gross Revenue Growth Rate
Tobin Q-Proxy

 

Share Price Growth Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.3 Variable (dependent and independent) that were used in this study

  1. Dependent Variables
Variable Definition
Probability Growth Rate (PGR) Ratio of difference of net profit 2017 & 2018 to net profit 2017
Revenue Growth Rate (RGR) Ratio of difference of sales 2017 & 2017 to sales 2017
Total Assets Growth Rate (TAGR) Ratio of Assets growth with time
Tobin Q-Proxy (TQP) Sum of market value of equity plus book value of debt, divided by book value of assets.
Share Price Growth (SPG) The growth June 2017 to September 2019

 

  1. Independent Variables
Variable Explanation
Strategy(F1) Strategies divided into sections; a, b, c, l and n
Middle Management (F2) Managers sections; e, f, and g
Financial Analysis (F3) Finance sections; h, i and k
Top Management (F4) Top managers sections; d, j and m

 

 

The sections for the independent variables included in the SPSS Component matrix:

  • Strategic investment decisions emerge through the formal planning processes of your firm.
  • Strategic investment decisions derive from an explicit corporate strategy.
  • We have formal procedures for evaluating strategic investment decisions.
  • A strategic investment proposal whose expected financial return meets the minimum requirement of return can be rejected if it does not fit with the firm’s competitive strategy.
  • A strategic investment proposal who’s expected returns fall below the required level can still be accepted for strategic reasons.
  • Lower-level managers in the organization are involved in the strategic investment decision.
  • Strategic investment decisions are influenced by the relative power of various managers in the firm.
  • Negotiations among managers in the firm influence strategic investment decisions.
  • Financial evaluation techniques are often used in the early analysis of the strategic investment
  • Financial evaluation techniques are often used in the final choice of strategic investment.
  • A strategic investment proposal will be rejected if its expected financial return does not meet the minimum investment requirement.
  • Investment opportunities are identified and proposed by top management.
  • The evaluation of strategic investment is left to the judgment top management.
  • A strategic investment proposal whose expected financial return meets the minimum requirement of return on investment can be rejected if it does not

1.      Results and Discussion

3.1 Factors affecting Strategic Investment decision-making

Table 1: Factor loadings of SIDM styles (SPSS pattern matrix)

Variable Strategy Middle Management Financial Analysis Top Managers Communality
SI proposal whoseexpected financial return meets the minimum requirement of return on investment can be rejected if it does not 0.781       0.686
SI decisions are influenced by the relative power of various managers in the firm. 0.765       0.657
Lower level managers in the organization are involved in SI decision 0.702       0.544
SI decisions are influenced by negotiations among managers in the firm 0.545 0.542     0.633
SI decisions derive from an explicit corporate strategy   0.824     0.696
Existence of formal procedures for evaluating SI decision 0.357 0.778     0.734
SI decisions emerge through the formal planning processes of your firm   0.632 0.424   0.638
Financial evaluation techniques are often used in the early analysis of SI   0.519 0.466   0.507
Evaluation of SI is left to the judgment top management     0.853   0.786
Investment opportunities are identified and proposed by top management     0.801   0.676
SI proposal rejected if its expected financial return does not meet the minimum requirement of return on investment   0.320 0.420 -0.367 0.454
SI proposal who’s expected returns fall below the required level can still be accepted for strategic reasons       0.725 0.636
SI proposal whose expected financial return meets the minimum requirement of return is rejected if it doesn’t fit the firm’s competitive strategy 0.574     -0.662 0.783
Financial evaluation techniques are often used in the final choice of strategic investment       0.584 0.384
Eigen values 2.653 2.468 2.089 1.602  
Proportion of variance explained (%) 18.95 17.632 14.923 11.443  
Kaiser Meyer Olkin Measure of sampling adequacy (MSA) 0.568
Bartlett’s Test of Sphericity (Chi-Square) 654.936 ***
(Number of degrees of freedom) (91)

Note: SI – Strategic investment

Factors extracted through principal component analysis, Varimax rotation with Kaiser normalization; converged in 6 iterations

Source:   Survey data 2018

Regression Results:

Table 2: Linear-linear regression output of factors affecting SIDM and their influence on corporate financial performance

Independent variables PGR RGR TAGR EGR SPGR
 

Strategy (F1)

0.266

(1.118)

0.162

(-1.408)

0.871

(-0.162)

0.817

(-0.232)

0.468

(-0.728)

 

Middle Management (F2)

0.200

(1.289)

0.060

(1.901) *

0.397

(0.851)

0.193

(-1.308)

0.825

(0.221)

 

Financial Analysis (F3)

0.968 (0.040) 0.108

(-1.620)

0.384

(-0.873)

0.588 (0.543) 0.618

(-0.499)

 

Top managers (F4)

0.619 (0.499) 0.694

(-0.394)

0.164

(-1.402)

0.042

(-2.058)

0.397

(-0.850)

Constant 0.701

(0.386)

0.071 (1.820) * 0.026

(2.258) **

0.040

(2.081)

0.123

(-1.554)

R2 0.022 0.050 0.033 0.047 0.014
Adjusted R2 -0.011 0.018 0.001 0.014 -0.019

Note: *** p<0.01, ** p<0.05, * p<0.1 (denote significance at 1, 5 and 10 percent respectively);

(t-statistic appear in parentheses); PGR, RGR, TAGR, EGR & SPGR are described in section 3.3

 

 

 

 

Table 3: Linear-log regression output of factors affecting SIDM and their influence on corporate financial performance

 

Independent variables PGR RGR TAGR TQP SPGR
 

Strategy (F1)

0.310

(1.020)

0.067

(-1.850) *

0.775

(-0.286)

0.899

(-0.127)

0.270

(-1.108)

 

Middle Management (F2)

0.209

(-1.263)

0.028

(2.229) **

0.392

(0.859)

0.131

(-1.520)

0.694

(0.394)

 

Financial Analysis (F3)

0.832 (0.212) 0.096

(-1.677) *

0.245

(-1.168)

0.744

(0.327)

0.433

(-0.787)

 

Top managers (F4)

0.773 (0.298) 0.880

(-0.152)

0.208

(-1.265)

0.021

(-2.336) **

0.584

(-0.550)

Constant 0.697

(-0.391)

0.064

(1.868) *

0.012

(2.539) **

0.011

(2.587) **

0.179

(-1.352)

R2 0.018 0.054 0.035 0.067 0.019
Adjusted R2 -0.015 0.022 0.003 0.035 -0.014

Note: *** p<0.01, ** p<0.05, * p<0.1 (denote significance at 1, 5 and 10 percent respectively);

 

Table 4: Log-log regression output of factors affecting SIDM and their influence on corporate financial performance

 

Independent variables PGR RGR TAGR TQP SPGR
 

Strategy (F1)

0.163 (1.410) 0.885

(-0.145)

0.256

(1.143)

0.455 (0.750) 0.061

(2.923) *

 

Middle Management (F2)

0.317

(-1.007)

0.820

(0.228)

0.361

(-0.918)

0.637

(-0.474)

0.065

(-2.860) *

 

Financial Analysis (F3)

0.876 (0.156) 0.978

(0.027)

0.801

(-0.253)

0.533

(-0.626)

0.115

(2.198)

 

Top managers (F4)

0.928

(-0.091)

0.831

(-0.241)

0.210

(-1.262)

0.550

(-0.600)

0.890

(-0.150)

Constant 0.199

(-1.296)

0.004

(-2.929) ***

0.015

(-2.482) **

0.109

(-1.621)

0.058

(-2.999) *

R2 0.027 0.002 0.033 0.019 0.751
Adjusted R2 -0.025 -0.042 -0.008 -0.026 0.419

Note: *** p<0.01, ** p<0.05, * p<0.1 (denote significance at 1, 5 and 10 percent respectively);

(t-statistic appear in parentheses); PGR, RGR, TAGR, EGR & SPGR are described in section 3.3

Table 5: Log-linear regression output of factors affecting SIDM and their influence on corporate financial performance

 

Independent variables PGR RGR TAGR TQP SPGR
 

Strategy (F1)

0.050

(1.993) **

0.598

(-0.529)

0.323

(0.993)

0.592 (0.538) 0.064

(2.879) *

 

Middle Management (F2)

0.337

(-0.967)

0.548

(0.603)

0.362

(-0.917)

0.998 (0.002) 0.074

(-2.695) *

 

Financial Analysis (F3)

0.787

(0.271)

0.986

(-0.018)

0.754

(-0.314)

0.609

(-0.513)

0.142

(1.982)

 

Top managers (F4)

0.896 (0.131) 0.864

(-0.172)

0.150

(-1.452)

0.566

(-0.576)

0.935

(-0.089)

Constant 0.071

(-1.835) *

0.004

(-2.978) ***

0.022

(-2.325) **

0.67

(-1.855) *

0.056

(-3.046) *

R2 0.051 0.006 0.036 0.013 0.749
Adjusted R2 0.001 -0.037 -0.004 -0.033 0.415

 

 

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