Investment Expenditures and Firm Value

As the economic environment has rapidly changed over the years, firms have faced serious problems when adapting to this environmental shift. This connotes that to challenge (or create) new business areas is very important for firms to survive, nowadays. Therefore, firms have to spend capital (investment expenditure: hereinafter, IE) to increase their competitiveness or to create new business areas. In this paper, we look at the effect of IEs on firm value, in line with different industries and markets. We use the capital expenditure (CAPEX), R&D expense (R&D), and advertising spending over total asset (ADR), as proxies of firms’ IEs. According to our findings, every type of IEs increases the value of a firm; this is easy to imagine as firms invest only in a project that has a positive NPV. However, by analysing results before we classify our sample data into sub-samples in line with industry and markets, we show that some interaction variables do not show a positive association with firms’ values. For example, the interaction variables of R&D×TECH and CAPEX×TECH indicate a negative relationship with firm value, if firms are in high-tech industries. However, the interaction variable of ADR×TECH presents that advertising spending more likely increases firm value for firms with high-tech industries. Furthermore, our findings likewise suggest that the influence of IEs on firm value vary across industries(particularly, high- and low-tech industries) in which firms operate and across markets (KOSPI and KOSDAQ) in which firms are listed. For instance, R&D expense has 2.3 times higher magnitude for firms in low-tech industries than those in high-tech industries. In addition, the magnitude of the coefficients of R&D expense for firms in the KOSPI market is 1.6 times greater than for those firms in the KOSDAQ market. In addition, after data has been classified into the KOSPI and KOSDAQ markets, we can observe that the coefficients of the interaction variables of CAPEX×TECH and ADR×TECH show an opposite direction between firms in the KOSPI and KOSDAQ markets. Over all, our finding suggests that IEs increase firm value, but the increasing relationship between high- and low-tech industries, and between the KOSPI and KOSDAQ markets, differ. Using the T-test, we double check the different relationships between IEs and firm value, with different industries and markets. These simple examples show that firms should be careful to maximise firm value when they decide a new investment plan in accordance with the industries in which they operate, and with the markets in which they are listed.