Effects of Business Strategies on Investment Efficiency

Abstract

Objective: Firm’s business strategy is an effective factor in investment efficiency and determining capital investment levels. Defender and prospector strategy as the strategy at the two edges of the business strategy spectrum proposed by Miles and Snow (1978) exposes firms at different levels of investment, monitoring, and management discretion, which have many implications for management investment decisions. The purpose of this study is to examine the effects of business strategy on firm’s investment efficiency Methods: Data of 119 companies listed in the Tehran stock exchange (TSE) in the period 2001 to 2015 has been obtained from Rahavard Novin news, financial statements and Codal Site of the TSE, and multinomial logistic regression model was used to test the research hypotheses. Results: Findings showed the firms that follow prospector and innovator strategy, invest in the highly risky projects and have higher probability for over-investment decisions. Whereas, the firms follow efficiency-oriented defender strategy are more likely to have under-investment decisions. Conclusion: In the firms following defender strategy, lower levels of managerial discretion, precise monitoring and fewer investment requirements lead to under-investment decisions. On the other hand, in the firms following prospector strategy, more managerial discretion, less stringent monitoring and massive investment requirements lead to over-investment decision.

Keywords

• business strategies
• under-investment decision
• over–investment