Financial Performance

How Financial Performance Impacts Investors?

Chapter 1: Introduction

1.1  Research Background

In the field of finance, firm financial performance and investments related decisions forms a significant aspect for a potential investor. Investments is related to employ financing or funding to firm business operations for a certain period where the decision makers seek to improve investor wealth. In this context, decision making involves sequential steps that identify a business opportunity/ issue to approve funding (Geels, 2013). The investor decision making is a multi-criteria process that considers political, economic, social and environmental aspects, government regulations and other risk factors. However, it is also recognized that the existing performance of firm in financial terms holds importance in the process of investment related decision of investors. The financial performance of firm assetsbears an influence over investment decisions(Guariglia and Mateut, 2010). The measurement of a firm financial performance is a main concern for investment decision making and other economic based decisions. To understand the concept of financial performance it is essential to consider its measures and related concepts like profitability, returns on investment, liquidity and solvency. The investors are always seeking a firm financial information in terms of sales growth, profitability, return on equity (ROE) and return on investment (ROI). Profitability of a firm indicates its ability to produce profits or return on investment from its existing resources thus, forms an important measure of financial performance and future success (Al-Najjar and Hussainey, 2011). Thus, the analysis of profitability ratio determines the extent to which resources are utilised effectively and identifies the worth of making investment decision in a firm. In addition to this, measure of financial liquidity is essential to understand the stock market situation and realise the ease to convert the shares into cashon major exchanges to meet short term financial obligationsand thus, impacting the interest level of investors in the firm. Thus, investors seek interest in firms with current ratio greater than twoas a decent liquidity position (Bhattacharjee et al., 2009).Similarly, solvency ratios provide investors on the firm capability to develop impending assets and to meet its long-term financial obligations. Apart from this, valuation ratio is also used by investors in making decisions about an investment.Another measure of financial performance is return on investment that evaluate the loss/gain percentage produced from money invested to analyse the efficiency of decisions in different ventures.  Thus, it is crucial for the investors to take account of these financial measures of performance system to get high returns and to increase the efficiency in making investment decisions.But lack of understanding of performance measure in absence of firm performance data has impacted investment decisions. This research attempts to gain a deeper understanding on how to the financial performance of firms can impact decision-makers for making investments.

1.2  Research Problem

Investments in business play a crucial role in maintaining a competitive position and influencing the financial status of a firm.The potential of investment is huge for a firm productivity and profitability aspects(Joyce et al., 2011).At the same time, investments demand a motivated involvement of different stakeholders of a firm. However, many investors face difficulty to determine the firm financial performance in order tostructure their decisions for new ventures and other funding purposes. It is essential to identify the influence of the financial performance impact on investment related decisions as it is crucial for the value of the firm and for its competitiveness and to attain sustainability in the competitive marketplace. Simultaneously, its understanding is also crucial for the investors to fulfill the core aim to achieve high returns. It can be noted that there is growth in the investment market as the firm are continuously attracting investors however, still there is a lack of firm performance data that is creating barrier for the potential and existing investors to continue investment in firm activities. This is also creating a challenging situation for the firms to seek effective financing options and attract investors(Samy et al., 2010). Many investors still lack adequate direction for achieving optimal investment decisions for a firm which is principally attributed to financial performance(Chevalier-Roignant et al., 2011).This circumstance has caused investors making loss and getting lower returns from the investment made. This has also contributed to loss of investor confidence towards a firm.In relation to this problem, this study has focus on determining the impact of firm financial performance on potential and existing investors in making future investment decisions.

1.3  Research Aim andObjectives

The main aim of this research is to determine how the financial performance of firms can impact investment decision-makers. Tofulfil this research aim, the following research objectives are realized by the researcher for the successful completion of this study:

  • To develop understanding of the theoretical concepts related to financial performance and investment.
  • To explore the factors facilitating the investments by the firms in retail sector.
  • To examine the relationship between financial performance and investment in terms of liquidity, profitability and efficiency and investment decisions

1.4  Research Questions

To fulfill the research objectives, the succeeding research question are analyzed from this research:

  • What is the relationship between financial performance and investments for a firm?
  • What is the significance of a firm financial performance in investment decisions in relation to liquidity, profitability and efficiency and investment decisions?
  • What are the factors that facilitates investments by the firms?
  • To what extent a firm financial performance influences investment decision making by investors?

1.5 ResearchJustification

This research is valuable for the investors in terms of investment decision making considering the financial performance of the firms to get a higher return and make safe investments. It is also essential to access the efficiency of investments decision making for economically stable firms. With the support from this research, the investors can assess its investment decision for firms. The assessment of firm economic performance is required by managers to improve the activities. assess the potential risks and to provide valuable information for investment decision making with the focus of promoting the firm to investors(Elzahar and Hussainey, 2012).The managers can design strategies around firm financial performance to attract potential investors and develop confidence in existing investors to increase the level of investment in firm activities to avoid any financial distress. This research is also undertaken to make its contribution in the existing literature and to develop the researcherknowledge of investment decisions making to fulfil the academic requirements.

1.6Research Significance

The findings of this research can provide a useful insight to the investors in making optimal investment decisions.  The results of this research can provide a better understanding to firm managers to realise impact of firm economic performance on the process of investors decision making to achieve financially successful investment in favour of firm and to develop investor confidence and sustain long term relationship with the investors. This can be helpful to managers to maximise the present value of the firm as well as to strengthen its market value by attracting more investors through high financial performance of firms(Guariglia and Mateut, 2010). For academicians, this research this study will be beneficial to develop the understanding and deeper knowledge on how the investors decision are structured in relation to a firm economic environment. This research also presents the understanding of firm managers who face difficulty in attracting investors and provide an insight on how to manage investor confidence towards a firm(Geels, 2013). Thus, this research will try to narrow the gap in the existing literature from thisresearch primary findings. This will add to the existing literature in understanding the influence of firm economic performance on investors and as role of decisions makers. The findings of the research can also serve as a guideline to assist the potential investors and managers and well as finance field academicians to understand the importance of determining firm financial performance to establish safe investments in firms in consideration with a stable financial condition.

1.7 Research structure

Theresearch is broadly divided into following chapters as stated below to conduct this research in a systematic and structured way.

Introduction chapter: This constitute the first chapter that presents the information about the background and the problem statement of the research topic. It also lists the research aim and objectives and questions that serve as a direction for the researcher for conducting an effective research. It also underlines the purpose and justification of research and mentions the significance of this research for the firms, investors, academicians and future researchers.

Literature review chapter:This constitute the second chapter which provides review of theoretical concepts related financial performance and investment decision makers. It also analyses the research questions from the existing information from eBooks by academicians and journals published by other researchers. The literature of past research papers is reviewed to develop understanding of the research topic.

Methodology chapter: This forms the third chapter in the research which includes the research design, philosophy and approach and description of research methods and data collection, analysis and interpretation techniques through utilising approach of desk research to address the research questions and reach a valid outcome.

Data Analysis and discussion of results:In this fourth chapter, the primary findings related to each research question are presented in the organised manner using data management tools for data distribution and representing data in form of tables and charts. It also presents an analysis and discussion on the primary findings obtained through desk research. This chapter provides link of theoretical concepts with primary research findings.

Conclusions and recommendations: This forms the last and fifthchapter in this research. This chapter provides summary of the key research findings towards fulfilling the research objectives. This chapter also provides the recommendations based on the research observation and findings as well as provides implications for the researchers to progress the study further.

References

Al-Najjar, B. and Hussainey, K. (2011). Revisiting the capital-structure puzzle: UK evidence. The Journal of Risk Finance, 12(4), pp. 329-338.

Bhattacharjee, A., Higson, C., Holly, S. and Kattuman, P. (2009) Macroeconomic instability and business exit: Determinants of failures and acquisitions of UK firms. Economica, 76(301), pp. 108-131.

Chevalier-Roignant, B., Flath, C. M., Huchzermeier, A. and Trigeorgis, L. (2011) Strategic investment under uncertainty: A synthesis. European Journal of Operational Research, 215(3), pp. 639-650.

Elzahar, H. and Hussainey, K. (2012) Determinants of narrative risk disclosures in UK interim reports. The Journal of Risk Finance, 13(2), pp. 133-147.

Geels, F. W. (2013) The impact of the financial–economic crisis on sustainability transitions: Financial investment, governance and public discourse. Environmental Innovation and Societal Transitions, 6, pp. 67-95.

Guariglia, A. and Mateut, S. (2010) Inventory investment, global engagement, and financial constraints in the UK: evidence from micro data. Journal of Macroeconomics, 32(1), pp. 239-250.

Joyce, M., Lasaosa, A., Stevens, I. and Tong, M. (2011) The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking, 7(3), pp. 113-161.

Samy, M., Odemilin, G. and Bampton, R. (2010) Corporate social responsibility: a strategy for sustainable business success. An analysis of 20 selected British companies. Corporate Governance: The international journal of business in society, 10(2), pp. 203-217.

Links

https://www.econstor.eu/bitstream/10419/125691/1/WWWforEurope_WPS_no039_MS205.pdf

http://eprints.leedsbeckett.ac.uk/533/6/Corporate%20social%20responsibility%20a%20strategy%20for%20sustainable%20business%20success.%20An%20analysis%20of%2020%20selected%20British%20companies.pdf

https://dspace.stir.ac.uk/bitstream/1893/10370/1/Determinants%20of%20Narrative%20Risk%20Disclosures%20in%20UK%20Interim%20Reports.pdf

 

 

 

 

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