Page 107 - Azerbaijan State University of Economics

Nazrin Mammadova: The Effect of Investment Decisions on Firms’ Profitability (Empirical
Study on Listed Companies)

A company's investment choices are typically referred to as its capital budgeting or
capital expenditure choices. A decision made by the company to invest its current
resources most effectively in long-term assets in anticipation of a projected stream of
benefits over a number of years is referred to as a capital budgeting decision. An
efficient allocation of capital and an appropriate capital structure are critical decisions
for any business organization. A bad investment choice could cause a company to
incur losses and eventually close. The choice is significant not only for the
requirement to optimize investor and owner equity returns, but also for the effect it
will have on how well the organization can respond to its competitive environment.
Companies must have enough capital available to expand their operational activities
in the battle to meet market demand. Companies can simply increase their operational
operations through wise investments, which will have an effect on boosting corporate
earnings. Profitability itself is the primary goal of the establishment of a company in
order to maintain the sustainability of its business in the future; this is because
profitability shows whether the company has good prospects in the future or not
(Wijaya and Sedana, 2015). According to signaling theory, good investment activity,
and high-profit income can provide a positive signal about the growth of the company
in the future, so that it can increase stock prices which are used as a reflection of
company value (Achmad and Amanah, 2014; Amarudin, Adam, Hamdan and Hanafi,
2019). The reason for this is that when market confidence grows and investors allocate
more money to the company without hesitation, the company's stock price will rise as
a result. This idea is supported by Fama and Eugene (1978) by the statement that the
value of the company is solely determined by the investment decisions of the
company's management. Since they are one of the key factors that affect business
success or failure, as well as firm value in the end, the significance of investment
decisions and the decision-making process on financial performance of organizations
cannot be deemphasized.

The aim of the research is to answer the following research question: What is the
Effect of Investment Decision on the performance of firms listed on an exchange? The
findings of this study will help businesses and managers develop effective methods
for investing in stocks, bonds, and other debt or equity instruments so they can take
full advantage of the expanding investment market. In turn, this will provide them a
competitive advantage. On of the main purposes of this study is to make a contribution
to the study of investment decisions of listed companies. Firms can make more
intelligent investment judgments if they are aware of corporate investment decisions
and how they relate to business profitability. Investment analysts will also benefit
from this study.

107