Do appropriations stimulate investments? A study of the relationship between appropriations and investments
Abstract: Investments are necessary for firms in order to stay competitive and grow(Klammer et al., 1991). For funding investments retained earnings have shown to be important in the Scandinavian context (Eklund, 2010), hence an improved cash flow to fund investments would be of importance. By deferring taxes cash flow could be improved. Furthermore, research has shown accelerated depreciation can stimulate investments (Polzin et al., 2018; Ackermann et al., 2016; House & Shapiro, 2008). In this study the Swedish GAAP is investigated and if its possibilities of deferring taxes by using appropriations stimulates investments. We study appropriations, an income statement account which includes accelerated depreciation and tax allocation reserves. Appropriations are no real revenues or costs but actually only accounting transactions in order to steer the before tax income in a desired direction. The aforementioned studies indicatethat accelerated depreciation stimulates investments and the importance of internal funds. Wetherefore hypothesise appropriations should stimulate investments in the companies and that thiseffect is especially strong in manufacturing companies as these have large assets. Therefore,two models were tested, one with all companies in our sample and a subsample of manufacturing firms. The study uses a sample of the 215 largest non-listed companies in Sweden using five years of accounting data, for the period 2013 to 2017. From this sample a subsample of 59 manufacturing firms was drawn. Investments were measured as the negative cash flow from the investment activities on the cash flow statement.Appropriations are taken directly from the income statement. Aside from the main variables in the study, 12 control variables were included to improve the models. In order to make the study more valid the constructed models were based on previous researchperformed by (Eklund, 2010; Gugler et al., 2004). A regression analysis was made for carrying out the analysis. The results indicate from the general model show a significant relationship between appropriations and investments made by firms. The model had an R-square of 0,1836 which indicates it can explain 18,36 percent of the variation in investments. However, the second model tested regarding the relationship between investments and appropriations for manufacturing firms did not prove significant. The conclusions drawn from the study is that there is a relationship between appropriations and investments in the firms in general, but nothing specific can be said about manufacturing companies.
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