Over-Investment Theory

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Literature review is one of the imperative sect of the research work in which all the relevant theories and empirical papers are elucidated in order to frame an intact framework for the research work. The main purpose of this part is to provide guideline to the research that will enhance realisation of research objectives and providing answers for the research questions. It is divided into two building blocks, which include theoretical framework and empirical findings. The theoretical framework enhances an understanding of the theories and concepts that enhance an understanding of the roles of financial decisions on the firm’s growth and finance capital and firm growth. The empirical studies provide a comprehensive review of the most influential…show more content…
These significant theories in enhancing the financial decision include over-investment theory and under-investment theory. The underinvestment theory is built on the basis that insist on the negative effects of a firm in taking to high amount of corporate debt on the firm value.
The over-investment theory also form a very significant component in financial decision and it applies in those cases where there are limited growth opportunities. It also applies when there is high relationship to the free cash flows. The theory creates a crucial emphasis that indicates negative consequences on high level of cash flow that is left under discretionary control of the financial manger making the decision on behalf of the firm. When the firms are faced with limited growth opportunities, the rational financial decision is to avoid wasting cash flow on unproductive projects. The factor is important to a firm since it enhance discipline in making the financial decision on issuance of debt that can facilitate losing the control of free cash flow. This explanation of overinvestment theory indicates that a firm has a positive relation between the firm value and the debt especially when there is limited or no growth. With the motive, investment if management invests more than required capital in a specific project, then over invested
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Those firms that have a negative NPV projects face a risk of making financial decision that will misuse their financial resources. This is consistent with the free cash flow theory that illustrates how shareholders welcome payment of the dividends especially when funds under the discretional control of the firm managers decrease. In addition, the theory indicates that value of a given firm is positively related to the payout of dividend in a firm especially when there are poor growth opportunities. Empirical study showcase the that free cash flow would have vital impact on the economic growth of the organisation because it increases the free cash value in which economic value of the organisation increases which indicates economic growth of the organisation.
2.2. Personal loans
Personal loans are one of the most basic types of consumer finance. A personal loan is a simple loan of a certain amount of money from a lender to a borrower that the borrower can spend any way he chooses. Personal loans are usually unsecured loans. When a loan is unsecured means, the borrower does not put any property as collateral for the loan that the lender can take if the borrower does not repay the loan. Personal loans often have higher interest rates than secured loans, because lenders assume more risk when they do not have the option of taking possession of collateral.

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