The Nexus Between Corporate Investment Decisions and Firm Profitability: Moderating Role of Cash Flows and Investment Opportunities

Abstract

The study aims to investigate the moderating role of cash flows and investment opportunities in the relationship between investment decisions and firm profitability with a panel data analysis for 107 real sector firms traded in Borsa Istanbul for the period 2000-2020. Return on assets and return on equity variables are selected for firm profitability, while growth rate of fixed assets, growth rate of total assets and growth rate of capital expenditures to total assets are selected for investment decisions. As a result of the analysis, it has found that investment decisions have a significant impact on firm profitability. The study also finds that the interaction of cash flows and investment decisions and the interaction of investment opportunities and investment decisions have significant effects on firm profitability and that the inclusion of these interaction variables in the model increases the impact of investment decisions on firm profitability. The findings support the pecking order theory. In the relevant period and sample, it can be said that firms tend to use both internal and external financing.