Investing in marketable securities: Managerial decisions and consequences

Abstract

The purpose of this dissertation is to examine investment decisions made by managers of firms having a portion of their assets committed to projects classified (for financial accounting purposes) as investments in marketable securities, and the corresponding consequences of such decisions on the firm. Of particular concern are managers' decisions to select investment alternatives emphasizing non-optimal investment projects, as suggested by a speculative intent. The research focuses on two main issues: (1) identifying the environment most conducive to finding the existence of marketable security investments; and (2) the effect on firm performance of holding various levels of this type of investment. Results provide support for the existence of investments in marketable securities in settings where an abundance of investment opportunities exist. This finding is consistent with the notion that growth firms have more incentive to smooth earnings and are in continual need of funding for profitable investment projects. The results also indicate that, compared to firms with no investments, firms with a relatively low level of investments in marketable securities have higher firm performance. However, as the level of marketable security investment increases beyond this threshold, the performance of the firm eventually declines below that of no-investment firms.