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Firm Investment Behavior under Hyperinflation and Dollarization: A Case of Zimbabwe Listed Firms

Zimbabwe’s experiences hyperinflation (2000-2008) and dollarization (2009-2019) has implications on the making of investment decisions. The uniqueness of these periods justifies the need for a critical analysis as decisions on whether or not to invest are sensitive to such structural changes. In view of this, the study uses the modified Tobin’s Q model to examine the main determinants of investment behavior. A dynamic and non-linear model is applied using data from a panel of 30 listed and non-financial firms for the period 2000 to 2016. The main determinants of investment decisions are managerial discretion or power, financial constraints, uncertainty and access to external sources of finance. Findings are sensitive to the period of analysis and consistent with the pecking order hypothesis. Interactions between investment expenditure and other corporate financial decisions are confirmed. Policy makers need to take a differentiated approach in making investment decisions. It is desirable to develop policies that are sensitive to prevailing market conditions; reduce financial constraints and remove informational inefficiencies to improve uptake of debt finance and other external funding sources. Monitoring of managerial decision making power will reduce levels of entrenchment and hence the agency problem. Firms should improve on future financial flexibility by taking less debt and a dynamic investment strategy that is sensitive to firm size is more plausible.