Does efficiency influence firm investment size? Evidence from Ghana

Firms commit huge funds into investment in order to maintain their operational capacity, going concern, and to maximize shareholder value. This action in many instances defines the success of the firm. The question is, How do efficiency and free cash flow associate with firm investment? This paper employs fixed and random effects to answer how technical efficiency estimates using the Data Envelopment Analysis technique and free cash flow influence firm investment. The data was sourced from published annual reports of sampled listed companies. The findings are that technically efficient firms tend to decrease firm investment. Free cash flow to the firm matters in the case of depreciation and amortization for firms. There exists a direct relationship between big size firms and firm investment. Increasing inflation and a depreciating domestic currency do not induce firm investment. The study recommends that inefficient firms must reduce their input mix to match the given level of output if they are to create value for shareholders through reduced firm investment. This article links technical efficiency to firm investment and depreciation and amortization of listed banks and manufacturing firms and is the first of its kind on Ghana.