Overinvesting

Firstly, Vietnam's financial market is underdeveloped with weak institutional quality and severe information asymmetry, and commercial banks provide the large majority of financing sources to enterprises. Secondly, the problem of overinvestment is neglected in this country though the conflicts of interests between shareholders and managers are serious in Vietnamese companies. The research data is collected from Thomson Reuters Eikon for all financial statements of Vietnamese listed companies in the period of — Furthermore, overinvestment is measured in two ways by using HP filter and investment demand function the positive residuals from the sub-equation.

These two new measures are considered to be more appropriate proxies for overinvestment than Tobin's Q because they are based on various determinants of investment policy as well as data on the amount of investment. From the estimated results, overinvestment is more likely to worsen profitability. Nevertheless, when taking into account either debt policy or dividend policy together with investment policy, the negative effect of overinvestment on profitability can be lessened.

Surprisingly, when these three policies are combined in the decision-making process, debt and dividend policy can hamper the positive influence of the two-variable interactions. The coefficient signs of variables imply that debt policy and dividend policy can substitute each other through the negative sign of the single debt and dividend policy and the positive sign of their interaction.

Applying two different representatives for overinvestment is also a way to check the model robustness. All signs and significance level in various models with the alternative combination of two overinvestment measures and six profitability proxies are consistent, indicating the strong validity of the regression model. In short, the results are supposed to make two contributions to the existing empirical review in two respects.

First, the study is the first attempt to consider the interaction among three financial policies and their impacts on firm performance. Secondly, our results support the agency theory, which suggests the interdependence among debt, dividend and investment policy. In addition, these findings and contributions can give shareholders certain recommendations in resolving agency problem within corporate enterprises. The research is structured into five sections.

Section 2 reviews theoretical and empirical studies to help develop research hypotheses. Section 3 describes data collection, clarifies overinvestment measurement and establishes model specification. Section 4 presents estimated results and discussions.

The final section summarizes the whole research and provides some policy recommendations for both mangers and shareholders. Literature review and hypothesis development A perfect capital market proposes some assumptions including 1 no taxes, transaction and bankruptcy costs among market participants; 2 two-way information symmetry between shareholders and managers; 3 fair debt burdens between shareholders and debtholders Modigliani and Miller, ; Miller and Modigliani, Relaxing any assumption paves the way for the development of other theories on the imperfect capital market.

Trade-off theory expresses the benefit of debt tax shield and the cost of financial distress Modigliani and Miller, ; tax theory illustrates dividend pay-outs under different tax brackets Litzenberger and Ramaswamy, ; pecking order theory emphasizes on the financing hierarchy from least to most liquid sources Myers and Majluf, ; bird-in-hand theory supports the role of dividends in reducing uncertainties Gordon, , ; agency theory indicates the conflicts of interests between managers and shareholders Jensen and Meckling, Conflicts of interests occur due to divergence in ownership rights of shareholders and management rights of managers Jensen and Meckling, Having a comprehensive understanding of internal operation, managers make decision to benefit themselves with higher salary, promotion and property under their control.

Such an underlying motivation explains for overinvestment. In case shareholders fail to detect their behaviours through monitoring business activities, the problem may deteriorate Myers and Majluf, ; Brealey et al. Consequently, overinvestment will result in investment in projects with negative NPV and indirectly destruct firm value Liu and Bredin, ; Titman et al. Various empirical research studies have demonstrated the negative association between overinvestment and profitability.

Shima finds the negative effect of overinvestment in the sample data for listed Singaporean companies in the period of —; Farooq et al. They clarify that only optimal investment is effective in corporate enterprises in this country; Guariglia and Yang suggest that rarely does investment reach the optimal level due to agency problems which limit financing access as well as worsen firm performance; finally, Liu and Bredin and Yang also prove that overinvestment is negatively related to firm performance.

Ultimately, the research develops the first hypothesis on the overinvestment—performance relationship. Overinvestment adversely affects firm performance. Excessive free cash flow creates an opportunity for managers to benefit themselves by using the discretionary funds to increase resources under the control and enhance their position through making more investment Shi and Gao, ; Yeo, ; Shi, ; Hao et al.

Therefore, reduction in free cash flow is a solution to the expropriating behaviours of managers Jensen, ; Ali et al. In this situation, both debt and dividend policy can help restrain the bad effect of overinvestment with lower free cash flow in corporate enterprises and better monitoring tasks from outside parties Rozeff, ; Easterbrook, ; Jensen, ; Alli et al.

Similarly, Richardson emphasizes on the monitoring role in limiting excess free cash flow. What Are Unregulated Markets in Investing? In investing, unregulated markets means there are no governing bodies to help keep things in check if and when needed. But the downside to that is massive - in that there are no forms of protection if something goes wrong.

And who knows, maybe it was, but the fact was a hacker got into it and took everything he had. So what do you do? Overinvesting in anything has risks, while investing in unregulated markets has risk. So what happens when you put risk and risk together? More risk! In all seriousness, there are several key reasons overinvesting in things like crypto and NFTs is so risky: 1. The value of cryptocurrencies and NFTs can be incredibly volatile, and there's always the possibility that they could drop to zero overnight.

If you're not prepared to lose your entire investment, then you shouldn't invest in crypto or NFTs. You could end up losing every dollar you put in. You Could Get Hacked Like My Colleague Another serious risk of overinvesting in unregulated is that you could get hacked, and more importantly, have no recourse.

You could just as easily lose that storage device or worse, have it stolen. Even if you think you do. To start with, the underlying technology behind crypto and NFTs the blockchain is a simple idea, but very complex in terms of how it functions. As we have seen with the Bored Ape Yacht Club, this novelty can actually drive value, but it can also create ample space for shady business practices or mismanaged security.

For example, I worked with a freelancer to create some NFT content this past year. Super smart guy, and definitely knew a lot about the space. Months later, he launched his very own NFT.

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To start with, the underlying technology behind crypto and NFTs the blockchain is a simple idea, but very complex in terms of how it functions. As we have seen with the Bored Ape Yacht Club, this novelty can actually drive value, but it can also create ample space for shady business practices or mismanaged security. For example, I worked with a freelancer to create some NFT content this past year. Super smart guy, and definitely knew a lot about the space.

Months later, he launched his very own NFT. He went from creator to founder in a matter of months. Which is incredibly exciting. Government and Tax Unknowns Lastly, one of the bigger risks of overinvesting in unregulated markets is simply the idea that they may eventually become regulated. I may sound like a crazy person because I just said unregulation is a risk, but the flip side of that is regulation—which can cause challenges down the road.

For instance, governments could put a high-degree of regulation around new cryptocurrencies, or even ban them altogether. Certain companies may or may not be able to produce and sell NFTs, or they may have to be registered in a different way. Volatile assets have a place in a portfolio—it helps bring balance and often growth to the portfolio as a whole, but by overinvesting in one particular area i.

Find balance. Stock picking can be fun, but also risky. If you want to keep this passive and have it just managed for you, I suggest either choosing a broad index fund like VTSAX or using a robo advisor like Betterment. If you want to spend time researching sectors, you can invest in a broad mix of ETFs, which will give you immediate diversification. Or you can go even further and look at the company-level and pick individual stocks. Before you start picking individual stocks for the first time, make sure you learn the basics of stock valuation and reading a stock chart.

After you understand the basics, start by picking companies to invest in. Remember, stocks might sound like a lot, but you want to find balance out of the gates and not overinvest in any one stock or sector. It is because of this consumption component that people tend to over-invest.

They are using criteria other than purely financial ones when deciding how much to invest into the asset. They are prepared to spend more on a house or car than it is worth on the open market because they derive benefits from using them. Because of the confusion between consuming and investing, they may over-invest or under-invest compared to what they would do if the investment were clear.

Another major problem is that people spend more on consumption value such as home rent because they own the asset and mistakenly think that they are investing, when really they are consuming a house bigger than the one they would normally rent. Although they gain something from consuming more, since it is more than they would normally consume, they are wasting some money on something they would not normally buy, and thus in a sense over-investing by over-consuming.