Do investment opportunities influence private firms’ performance? International evidence from developing countries

The Resource-Based View (RBV) framework contends that a firm’s sustained competitive advantage depends on leveraging resources and capabilities that are valuable, rare, inimitable, and organised (Barney, 1991). While public firms often have more opportunities to exploit such resources, leading to superior performance (Hutchinson and Gul, 2004; Lin and Wu, 2014), private firms typically lack comparable resources and capabilities. Consequently, much of the existing research focuses on public firms, documenting positive impacts of investment opportunities on various performance metrics, including equity offerings (Corby and Stohs, 1998); compensation and performance (Baber et al., 1996); stock liquidity (Becker-Blease and Paul, 2006); secured debt financing (Chang et al., 2007); goodwill impairment write-offs (Godfrey and Koh, 2009); Big 5 auditor engagement (Lai, 2009); and audit report delays (Azami and Salehi, 2017).

However, scholarly attention on private firms’ investment opportunities and their ability to leverage scarce resources and capabilities for performance enhancement has been limited (Bar-Yosef et al., 2019). This research gap is critical to address for several reasons. Firstly, private firms are key contributors to global GDP and generate two-thirds of total employment, dominating economies worldwide, including the United States (US) and European Union (EU) (Asker et al., 2015; Eurostat, 2018; Bar-Yosef et al., 2019). Secondly, private firms possess unique characteristics, such as concentrated ownership and higher managerial ownership, which influence agency dynamics. Unlike public firms that face principal-agent conflicts, private firms often encounter principal-principal conflicts between controlling and minority shareholders (Morck et al., 1988; Dharwadkar et al., 2000). Additionally, private firms’ limited access to capital markets compels them to rely on internal financing, making the efficient exploitation of investment opportunities even more critical to their performance (Chen et al., 2011). Furthermore, governance mechanisms differ substantially; while public firms face stringent regulatory scrutiny and disclosure requirements, private firms operate with less transparency, impacting their decision-making and strategic choices (Hope et al., 2011). Despite these distinctions, no studies to date examine the impact of private firms’ investment opportunities ^[1] on performance, particularly using evidence from private firms in developing countries. This study addresses this gap by exploring the association between investment opportunities and firm performance in private firms and investigating how female ownership and concentrated ownership moderate this relationship.

We argue that a firm’s survival and sustained growth in competitive markets depend significantly on its ability to effectively utilise productive capacity in a constantly evolving environment. The Dynamic Capability View (DCV), an extension of the Resource-Based View (RBV), examines the influence of dynamic markets on firm performance (Helfat and Peteraf, 2003). Teece et al. (1997) introduced DCV to highlight the critical role of a firm’s capabilities in building, integrating, and reconfiguring resources to adapt to the ever-changing business landscape. The underlying premise of DCV is that firms must leverage their competencies not only for short-term competitive gains but also to establish long-term advantages. Following the accounting, finance, and economics literature, we conceptualize investment opportunities as a firm’s ability to allocate scarce resources productively, positioning them as a dynamic capability. Firms that effectively leverage investment opportunities can attract and retain talent, foster innovation, and strengthen distribution networks, all of which drive superior performance and ensure long-term survival and growth.

We measure private firms’ investment opportunities using capacity utilisation rates, following Ayyagari et al. (2011), a measure commonly employed by business analysts. Baumohl (2012) argues that capacity utilisation rates quantify economic slack and serve as leading indicators of business investment expenditure. Firms operating near full capacity are more likely to invest in additional capital and expand their workforce to increase production levels (Lane and Rosewall, 2016). To meet the constant challenges of evolving market expectations, firms must continuously enhance their processes and strategically allocate resources to develop innovative products and services. Increasing evidence indicates that a firm’s performance heavily depends on its ability to integrate, build, and reconfigure scarce resources and capabilities, ensuring survival and sustained growth in a dynamic market environment.

We further argue that a private firm’s ability to leverage its investment opportunities to enhance performance is influenced by factors such as gender diversity among owners and ownership concentration. Therefore, we investigate the moderating roles of female ownership and concentrated ownership in the relationship between investment opportunities and private firms’ performance. Prior research argues that women bring diverse knowledge, values, norms, and perspectives to a firm, which can enhance team dynamics and organizational outcomes (Ruigrok et al., 2007), strengthen management capabilities (Krishnan and Park, 2005), and drive profitability and higher stock returns (Krishnan and Parsons, 2008). Accordingly, we test whether female ownership moderates the association between investment opportunities and firm performance. Additionally, research highlights that private firms often have high ownership concentration, with shareholders frequently holding managerial positions that can result in the expropriation of minority shareholders. Chen et al. (2011) suggest that private firm shareholders are less motivated to engage in high-quality corporate disclosures or earnings management since they do not typically seek capital from public markets. The literature offers mixed evidence on the impact of concentrated ownership on firm performance: while some studies find a positive effect (Gorton and Schmid, 2000; Mitton, 2002; Kim and Lu, 2011), others report a negative or insignificant association (Demsetz and Lehn, 1985; McConnell and Servaes, 1990; Leech and Leahy, 1991; Demsetz and Villalonga, 2001; Chen et al., 2005). Thus, we examine whether concentrated ownership is likely to moderate the association between investment opportunities and firm performance.

Using 36,185 observations from 2006–2018 across 114 countries, we examine the association between private firms’ investment opportunities and their performance, and the moderating role of female ownership and concentrated ownership in this association. Our findings indicate that private firms’ investment opportunities are positively associated with their performance, suggesting that firms with greater investment opportunities achieve higher performance. Additionally, we find that female ownership strengthens this positive relationship, as female owners contribute unique resources, such as creativity and innovation, which enhance firm performance. Conversely, concentrated ownership weakens the positive association, likely due to increased agency costs and information asymmetries that hinder investment opportunities and, in turn, firm performance. To address potential endogeneity arising from both observable and unobservable selection bias, we employ the Heckman (1979) two-stage model and propensity score matching (PSM) analysis. Furthermore, we utilize an advanced supervised machine learning approach to provide deeper insights into how investment opportunities predict private firms’ performance. Additionally, we employ alternative proxies for firm performance and investment opportunities to evaluate the robustness of our findings.

The current study contributes to the literature in several ways. Firstly, to the best of the authors’ knowledge, it is the first to examine the impact of investment opportunities on firm performance using data from private firms worldwide. Prior studies highlight the scarcity of research on private firms (Chen et al., 2011; Badertscher et al., 2013; Asker et al., 2015); thus, our findings contribute to the emerging literature on private firms. Secondly, the study’s findings contribute to the dynamic capability view extended the RBV framework, as we document a significant positive association between investment opportunities and firm performance. This indicates that private firms utilising a higher capacity level achieve higher firm performance. Thus, support is found for the dynamic capability concept’s basic assumption that dynamic firms utilising their resources may generate higher firm performance to ensure their survival and continued growth. Finally, while managers have a choice to tap into investment opportunities to enhance private firms’ performance, we consider the influences of female ownership and concentrated ownership in this link. We document that private firms with a higher proportion of female ownership can achieve higher performance than private firms lacking this attribute. The positive association between investment opportunities and private firms’ performance is found to be attenuated by concentrated ownership. Overall, these findings contribute to the corporate governance and firm ownership literature regarding the implications of female ownership and concentrated ownership in private firms.

The remainder of the paper is structured as follows: Section 2 discusses the literature review, theoretical framework, and hypotheses development, while Section 3 outlines the methodology. Section 4 reports the empirical results, including the tests dealing with endogeneity concerns. Section 5 shows the sensitivity analyses and robustness checks. The conclusion is presented in Section 6.

In this study, with the underpinning of the DCV, we argue that investment opportunities represent a critical aspect of a firm’s dynamic capabilities that can have multiple implications for the firm’s performance. Chow et al. (2012) find that investment opportunities shape a firm’s ability to formulate its organisational business policies. Extant research demonstrates that investment opportunities assist firms in securing finance, providing dividends, and deciding compensation policies (Smith and Watts, 1992). Furthermore, investment opportunities show that, if firms have higher growth opportunities, they have a smaller amount of debt, distribute less dividends, provide a higher amount of executive compensation, and depend on additional stock option plans to motivate employees. These findings are similar to those of Gaver and Gaver (1993), who report that high growth firms have lower debt-to-equity ratios, lower dividend yields, provide higher compensation to their executives, and have higher stock option plans compared to non-growth firms.

Most of these studies, however, focus on the empirical effects of investment opportunities in the context of public firms. Limited attention has been given to exploring investment opportunities in private firms (Chen et al., 2011; Badertscher et al., 2013; Asker et al., 2015). Private firms differ in significant ways from public firms. Allee et al. (2020) present evidence from a sample of US firms showing that private firms experience lower changes in future profitability than public firms. However, the efficacy of investment opportunities is not universally guaranteed; investments may not always align with a firm’s core competencies or market demands, leading to inefficiencies (Ranasinghe and Habib, 2023). Moreover, private firms often face unique challenges, such as limited access to capital markets (Chen et al., 2011), which constrain their ability to capitalize on opportunities. External factors, such as economic downturns, regulatory changes, and shifting consumer preferences, may also negate the benefits of investments (Schwark, 2009; Bialowolski and Weziak-Bialowolska, 2014). These perspectives suggest that the impact of investment opportunities on private firms’ performance warrants further exploration in a global context.

We posit that private firms’ investment opportunities and firm performance are likely to be positively associated for several reasons. Firstly, the agency cost of private firms is relatively low compared to public firms due to concentrated ownership and control (Jensen and Meckling, 1976). This close monitoring by private firm owners is likely to enhance the firm’s value, as management strives to utilize growth opportunities effectively to improve overall performance. Secondly, dynamic capability refers to a firm’s ability to purposefully create, extend, or modify its resource base to gain a competitive advantage (Helfat et al., 2009). Firms typically prioritize resource allocation toward investment opportunities to achieve productive outcomes, such as offering innovative products, increasing market share, and expanding their customer base. Coelli et al. (2002) find a positive association between capacity utilization and profitability, attributing underperformance to unused capacity. Their study on 28 international airline companies reveals that 70% of the expected profit gap is due to unutilized capacity. Applying these insights, we argue that firms operating in volatile environments can largely attribute their performance to efficiently utilizing their investment opportunities. However, internal constraints, including managerial capacity, organizational structure, and culture, can impede effective utilization of investments, diminishing their potential to translate into enhanced performance (Park et al., 2015; García-Sánchez and García-Meca, 2018). Additionally, the phenomenon of diminishing returns suggests that beyond a certain point, additional investments yield progressively smaller increments in performance, particularly in saturated markets. Despite these challenges, we contend that when private firms effectively leverage their dynamic capabilities to utilize investment opportunities, they can significantly enhance their performance. Thus, we formulate the following hypothesis:

One of the significant differences between public and private firms lies in their ownership and leadership structure. In public firms, ownership is entirely separated from business operations. In contrast, owners of private firms are required to leave their personal mark on strategic and day-to-day operational decisions (Amore et al., 2014). Owners’ continuous support of a private firm, through their tangible and intangible resources, results in higher firm performance, thus ensuring its survival (Kamasak, 2017). Prior research suggests that female owners tend to be more risk-averse than their male counterparts (Welch et al., 2008; Ferrary, 2009; Gallucci et al., 2015), favouring strategies that ensure long-term sustainability over short-term gains. Our hypothesis builds on this by suggesting that female owners, due to their risk-averse nature, are likely to strategically utilize investment opportunities to enhance firm performance in a sustainable manner. This does not necessarily mean they will avoid high levels of capacity utilization altogether. Rather, they will pursue such opportunities in a way that aligns with their controlled growth strategy (Cliff, 1998). It means that when they decide to utilize high levels of capacity, they do so with thorough planning and consideration of long-term implications. This strategic approach can reduce future risks by ensuring that investments are well-managed and resources are efficiently allocated. Female owners’ focus on sustainable practices and innovation can lead to improved firm performance, as research shows that female leadership is often associated with enhanced team dynamics, better conflict resolution (Krishnan and Park, 2005), and higher levels of creativity and innovation (McMahan et al., 1998). Their risk-averse nature also means they are more likely to implement robust risk management practices, carefully evaluating and strategically leveraging investment opportunities to mitigate potential risks. While female owners may seek controlled and manageable growth (Cliff, 1998), this does not preclude them from effectively utilizing high levels of capacity utilization when such opportunities arise. Instead, their strategic and risk-averse approach can lead to more efficient and effective use of resources, thereby enhancing firm performance and reducing future risks. Therefore, we argue that female ownership moderates the positive association between investment opportunities and firm performance, formulated as the following hypothesis:

Although ownership concentration can minimise principal–agent conflict, it can create another principal–principal agency problem, particularly by tunnelling resources to provide more significant benefits for majority shareholders (Dharwadkar et al., 2000). Several studies (Chen and Steiner, 1999; Vafeas, 1999) examining firms with concentrated ownership and a higher level of family dominance have found that these firms can create multilevel conflicts between the principal and agent, as well as between majority shareholders and minority shareholders, with these conflicts cascading down between these parties. These multilevel conflicts adversely affect firm performance (Courteau et al., 2017). Prior research shows that when conflict arises between owners and managers due to the misalignment of their mutual goals, if ownership is concentrated, owners can use their majority voting rights and means to discipline managers by threatening their positions (Courteau et al., 2017). This dynamic can create organisational chaos and restrain managers from making independent professional decisions, potentially disrupting firm operations. For instance, managers may prioritise their job security by colluding with concentrated ownership’s shareholders, potentially leading to resource misallocation and lower firm performance. In the long run, this can lead to corrupt practices with the firm’s resources used for private benefits, thus contributing to the firm’s lower performance. A few studies document a positive association between concentrated ownership and firm performance (Gorton and Schmid, 2000; Mitton, 2002; Kim and Lu, 2011). However, Demsetz and Villalonga (2001)) find no statistically significant relationship between ownership structure and firm performance. Furthermore, Chen et al. (2005) find no relationship between family ownership and firm performance. Similarly, Leech and Leahy (1991) find a negative and significant relationship between firms’ ownership concentration and their value and profitability. Nevertheless, Morck et al. (1988) and Thomsen and Pedersen (2000) report a curvilinear relationship between concentrated ownership and firm performance.

In summary, we argue that concentrated owners may overly engage themselves in key critical managerial decisions to reduce agency costs in our sample’s small and medium-sized enterprises (SMEs). Over-monitoring of day-to-day business affairs by concentrated owners can dissuade a firm’s management from tapping into new investment opportunities (i.e. capital utilisation), although it has a positive association with firm performance. This excessive involvement may hinder managerial autonomy, constrain strategic flexibility, and stifle innovation, thereby negatively impacting the firm’s ability to capitalise on investment opportunities. As a result, we anticipate that concentrated ownership is likely to weaken the positive relationship between investment opportunities and firm performance. Thus, we propose the following hypothesis:

This study’s sample comprises all private firms covered by the World Bank Enterprise Surveys (WBES) from 2006–2018 across 114 countries worldwide ^[2]. The WBES are undertaken by the World Bank and its partners, covering small, medium, and large firms across all geographic regions worldwide. Each firm appears only once in the WBES, making the number of observations equivalent to the number of unique firms (Chen et al., 2011). Prior studies widely use WBES data for research on private firms (for example, Francis et al., 2008; Ayyagari et al., 2011; Chen et al., 2011; Francis et al., 2011; Ayyagari et al., 2013, 2014). The WBES include a wide range of quantitative and qualitative data, gathered through face-to-face interviews with firm managers and owners. The data cover several areas, including infrastructure, trade, finance, regulations, taxes and business licensing, corruption, crime and informality (i.e. the informal sector), innovation, labour, and perceptions of managers and owners about the constraints they face in owning or operating the business ^[3].

Table 1, Panel A presents the sample selection procedures. Our initial sample selection began with 139,054 observations. We omitted 70,722 observations due to insufficient data on investment opportunities and then omitted a further 14,600 observations due to a lack of availability of firm performance data. Finally, we excluded 17,547 observations due to insufficient data for control variables. Our final sample comprises 36,185 observations from 2006–2018, covering 114 countries.

Table 1, Panel B shows the industry distribution of observations in our study’s sample. Our sample is dominated by food industry firms that cover 19.08% of our observations, followed by the garments industry, which accounts for 11.89%, while the electricity, gas, and water industry (0.01%) has the lowest observations. Table 1, Panel C reports the year distribution of firms in our sample. Of the observations in our sample, 2014 accounts for 16.48%, followed by 2013, which accounts for 12.88%, and 2016, which accounts for 12.72%, while 2018 accounts for only 0.80% of observations.

Furthermore, Table 1, Panel D presents the country-wise distribution of firms in our sample. The sample is dominated by firms from India (14.48%), followed by Egypt (4.86%) and Bangladesh (4.63%), while Djibouti (0.02%) represents the lowest share. This distribution highlights the regional concentration of firms in certain countries.

We measure investment opportunities as a private firm’s capacity utilisation rate, following Ayyagari et al. (2011). Prior literature in economics uses industry capacity utilisation rates to measure industry investment opportunities (e.g. Ghosal and Loungani, 1996). Additionally, business analysts support capacity utilisation as an indicator measure for investment opportunities. Baumohl (2012) argues that capacity utilisation rates measure the amount of slack in an economy and are used as leading indicators of business investment expenditure. Firms that operate closer to their full capacity are more likely to have a greater propensity to invest in additional capital and to employ more employees, to increase their production (Lane and Rosewall, 2016). A higher capacity utilisation rate indicates that a firm needs to hire more employees and invest in capital stock (Lane and Rosewall, 2016) ^[4].

Prior research mainly studies investment opportunities using the share prices of publicly listed firms. However, studies on private firms are lacking as they are not listed on stock exchanges. Therefore, we use firm-level capacity utilisation rates as a close proxy for private firms’ investment opportunities. The WBES define capacity utilisation as the amount of current output in proportion to the maximum possible output level that can be produced by a firm using its available machinery, equipment, and regular shifts (Ayyagari et al., 2011). To measure investment opportunities, we rely on responses to the WBES question: “What was this establishment’s output produced as a proportion of the maximum output possible if using all the resources available (capacity utilisation)?” For investment opportunities, we also use the purchase of any new or used fixed assets as an alternative proxy to the WBES survey responses. Firms with a higher capacity utilisation rate are more likely to invest additional capital. Therefore, firms can hire more employees and invest in fixed assets to maximize their production level. This proxy is based on responses to the WBES question: “Did this establishment purchase any new or fixed assets, such as machinery, vehicles, equipment, land, or buildings?” The response to this question is converted into a dummy variable that takes a value of 1 if a firm invests in fixed assets; 0 otherwise.

We use actual annual sales growth as a measure of firm performance (PERF1), computed as the percentage change in annual sales between the current fiscal year and three fiscal years ago, following prior studies (Ayyagari et al., 2014; D'Souza et al., 2017). This measure of firm performance is provided by the WBES, which deflates all sales data to 2009 using each country’s gross domestic product (GDP). All sales data are converted into 2009 US dollars (US$) by the WBES for global comparability. In addition, we use annual employment growth (PERF2) as an alternative proxy for firm performance, computed as the percentage change in full-time employment between the current year and the previous fiscal periods, following D'Souza et al. (2017), with WBES also providing these data.

To examine the associations between our variables of interest and investment opportunities, we estimate the following ordinary least squares (OLS) regression model:

where the dependent variable, PERF, is measured as the actual annual sales growth. Our variable of interest, INVOP, is measured as a private firm’s capacity utilisation rate, as discussed in Section 3.2. We measure FEMOWN in Equation (2) as an indicator variable that takes a value of 1 if the firm has a female owner among its owners, and 0 otherwise. The variable CONTROL in Equation (3) is measured as an indicator variable that takes a value of 1 if the largest shareholder owns more than 50% of the firm, and 0 otherwise, following Hope et al. (2011).

We also control for several variables in Equations (1)-(3), following prior studies (Beck et al., 2005; Ayyagari et al., 2011; D'Souza et al., 2017). Larger firms have a lower level of various firm-level obstacles (e.g. financing, accessing legal systems, or dealing with corruption) compared to smaller firms (Beck et al., 2005). Therefore, we control for firm size (SIZE). Beck et al. (2006) document that older firms are more likely to face less growth constraints. D'Souza et al. (2017) find that firm age is negatively associated with private firms’ performance. Therefore, we control for firm age (FAGE). Boubakri et al. (2005) contend that foreign investors bring both monitoring and expertise to the firm, resulting in better operating firm performance. Thus, we control for foreign ownership (FOROWN). We also control for financial credibility (FINCRED), which brings transparency (Hope et al., 2011) and enhancing firm performance.

Export-oriented firms are more exposed to foreign markets, technology, and managerial expertise than firms that only operate domestically (D'Souza et al., 2017). Beck et al. (2005) document that export-oriented firms outperform their counterparts in terms of growth and firm performance. D'Souza et al. (2017) find that exporting firms are positively associated with private firms’ performance; our study, therefore, controls for export status (EXPORT). Firms with limited liability corporation status (CORP) may have a higher propensity than their counterparts to obtain external finance through banks, possibly leading to better firm performance. Therefore, we control for a firm’s limited liability corporation status (CORP). In addition, Beck et al. (2005) find that financing obstacles and corruption negatively affect a firm’s growth. Thus, we control for firm-level financing constraints (FINCONS) and business risk (BUSRISK). Furthermore, firms with greater dependence on external finance may have lower firm performance; thus, our study controls for external finance (EXTDEP). We also control for firm-level innovation (INNOV) as innovation may lead to better firm performance.  Appendix provides descriptions of the variables.

Furthermore, we include industry, year, and country fixed effects in our regression models to capture unobserved heterogeneity in relation to industry, year, and country. The variance inflation factor (VIF) is used to evaluate the potential for multicollinearity in our regression models. To support our first hypothesis (H1), a significant positive coefficient (β1) of INVOP in Equation (1) is expected. Similarly, a significant positive coefficient (β2) of INVOP × FEMOWN in Equation (2) and a significant negative coefficient (β2) of INVOP × CONTROL in Equation (3) are expected in support of our second and third hypotheses (H2 and H3), respectively.

Table 2, Panel A reports the descriptive statistics of the variables used in Equations (1)-(3). The average (median) firm performance, measured by actual sales growth, is 0.010 (0.000), indicating that the average actual sales growth for firms in our sample is 1%. This amount of sales growth can be explained based on the first-quartile, median, and third-quartile amounts of sales growth. The first quartile of sales growth is −8.4%, while the median sales growth is −0.0%, and the third quartile sales growth is 9.90%. The average investment opportunities, as measured by capacity utilisation, are 75.00%, close to the 78.80% reported by Ayyagari et al. (2014).

We measure firm size (SIZE) using WBES categories: large, medium-sized, and small. Our sample comprises 38% small firms, 37.60% medium-sized firms, and 24.40% large firms, closely aligning with Ayyagari et al. (2014). The average value of the natural logarithm of firm age (FAGE) in our sample is 2.880, corresponding to an average firm age of 21.28 years, which is close to the 20.61 years reported by Hope et al. (2011). About 30.70% of firms in our sample are owned by female entrepreneurs (FEMALE). The average foreign ownership of firms in our sample is 6.80%. About 72% of firms in our sample are controlled by block-owners (CONTROL) that is, those who hold more than 50% of ownership, which is close to 69%, as reported by Hope et al. (2011). Approximately 55.60% of firms in our sample have voluntary assurance services (FINCRED) for their financial statements. The average financial constraints (FINCONS) of firms in our sample is 1.47, which is close to 1.45, as Hope et al. (2011) reported. The average percentage of sales revenue paid by firms in our sample to government officials as bribes (BUSRISK) is 1.10%, which is close to 1.34%, as Ayyagari et al. (2014) reported. About 43% of firms in our sample have corporation (CORP) as their legal status, which is close to 39%, as Ayyagari et al. (2014) reported. On average, firms in our sample obtain 32.30% of their current financing (EXTDEP) from external sources, for example, equity, local commercial banks, and foreign banks. The average innovation measure of firms in our sample is 1.594.

Table 2, Panel B reports the mean and median test results of variables based on a firm’s high and low levels of investment opportunities ^[5]. The results indicate that firms with higher investment opportunities (HIGH_INVOP) are more likely to have higher firm performance in relation to sales growth (PERF1) and annual employment growth (PERF2); be larger in size (SIZE); have a higher level of concentrated ownership (CONTROL); be exporters (EXPORT); have lower financial constraints (FINCONS); make lower bribe payments (BUSRISK); and be more innovative (INNOV) than firms with lower investment opportunities (LOW_INVOP). Furthermore, firms with higher investment opportunities (HIGH_INVOP) have been in the market for a shorter time (FAGE); have less dependence on external financing (EXTDEP); and are not as likely to be a limited liability corporation (CORP), in comparison to firms with lower investment opportunities (LOW_INVOP).

Table 3 shows Pearson’s correlation matrix between the firm-level variables. As predicted, firm performance (PERF_GROWTH) is positively correlated with investment opportunities (INVOP). Overall, the correlation matrix shows no high correlations between variables except for between FINCRED and INNOV, with a significant positive correlation of 0.615. Furthermore, we examine the variance inflation factor (VIF) values to assess multicollinearity. The mean VIF value of the variables is 1.16, with a VIF value greater than 10 considered high (Gujarati and Porter, 2009). The lowest VIF value is 1.00, while the highest VIF value is 1.55, suggesting that multicollinearity problems are unlikely to be present in our regression models.

Hypothesis 1 (H1) predicts that private firms with a higher level of investment opportunities are positively associated with enhanced firm performance, while H2 and H3 posit that female ownership positively, and concentrated ownership negatively, moderate the positive association between investment opportunities and firm performance. We report the regression results for Equations (1), (2), and (3) in Table 4, Models (1)–(4). Model (1) only reports the regression results of all control variables, while Model (2) reports the regression results of the association between investment opportunities and firm performance. The coefficient of INVOP in Model (2) is positive and statistically significant (β = 0.084, p < 0.01), indicating that private firms’ investment opportunities are positively associated with their performance. Therefore, our H1 is supported. This finding can be interpreted to mean that private firms with a higher level of investment opportunities have a higher propensity to invest in additional capital and employ more employees, which, in turn, enhances their firms’ performance. In terms of economic significance, the estimated coefficient in Model (2) suggests that, with an increase of one standard deviation in investment opportunities, firm performance increases by 1.756%.

The explanatory power (R-squared [R²]) of the model with investment opportunities (INVOP) is 9.10%, as shown in Table 4, Model (2). We further evaluate the incremental contribution of the INVOP variable to the explanatory power of Model (2). Following Gujarati and Porter (2009), we repeat our main regression model in Table 4 after excluding the INVOP variable, as shown in Model (1). The R-squared value of Model (1) is reduced to 8.70%. Following Gujarati and Porter (2009), using the R-squared values of Models (1) and (2), the F-statistic is then computed. As reported in Table 4, Gujarati and Porter's (2009) F-statistic is 183.585, which is statistically significant at 1%, indicating that the variable, INVOP, provides significant information for predicting private firms’ performance.

Furthermore, we report the regression results for H2 in Table 4, Model (3). In Model (2), the coefficient of the interaction term, INVOP × FEMOWN, suggests the difference in the effects of investment opportunities on firm performance between private firms with female ownership and those without female ownership. The coefficient of INVOP captures the effect of investment opportunities on firm performance of private firms without female ownership. The sum of the coefficients of INVOP and INVOP × FEMOWN captures the effect of investment opportunities on firm performance for private firms with female ownership. The coefficient of INVOP is positive and statistically significant (β = 0.074, p < 0.01), suggesting that, for private firms without female ownership, an increase in their investment opportunities enhances firm performance. Furthermore, the coefficient of INVOP × FEMOWN is positive and statistically significant (β = 0.031, p < 0.05) in Model (3), supporting Hypothesis 2 (H2). This finding suggests that female ownership enhances the positive association between investment opportunities and firm performance. Additionally, the sum of the coefficients of INVOP and the interaction term, INVOP × FEMOWN, in Model (3) is positive and the test of the linear combination of the coefficients of INVOP and INVOP × FEMOWN shows statistical significance (F = 16.78, p < 0.01) ^[6]. In terms of economic significance, the estimated coefficient of INVOP × FEMOWN in Model (3) indicates that, with an increase of one standard deviation in investment opportunities, firm performance increases by 2.20%.

We next report the regression results for Hypothesis 3 (H3) in Table 4, Model (4). In Model (4), the coefficient of the interaction term, INVOP × CONTROL, suggests the difference in the effects of investment opportunities on firm performance of private firms with concentrated ownership and those without concentrated ownership. The coefficient of INVOP is positive and statistically significant (β = 0.120, p < 0.01), suggesting that higher investment opportunities enhance firm performance for private firms without concentrated ownership. On the other hand, the coefficient of INVOP × CONTROL is negative and statistically significant (β = −0.049, p < 0.05) in Model (4), indicating that the positive impact of investment opportunities on firm performance reduces for private firms with concentrated ownership. This finding suggests that concentrated ownership attenuates the positive association between investment opportunities and firm performance. Additionally, the sum of the coefficients of INVOP and the interaction term, INVOP × CONTROL, in Model (4) is positive, and the test of the linear combination of the coefficients of INVOP and INVOP × CONTROL shows statistical significance (F = 15.79, p < 0.01). In terms of economic significance, the estimated coefficient indicates that, with a one standard deviation increase in investment opportunities, firm performance increases by 2.51% for firms without concentrated ownership, while firm performance decreases by 1.48% for firms with concentrated ownership.

Regarding control variables, our results indicate that private firms that are larger (SIZE) with a higher level of innovation performance (INNOV) have a higher level of firm performance. We also document that private firms of long standing in the market (FAGE), with higher levels of business risk (BUSRISK) and limited liability corporation status (CORP), have lower firm performance. The negative coefficient of firm age (FAGE) is not surprising as younger private firms are more innovative and use technologies to cope with market competition, thus increasing their performance compared to older firms. Furthermore, facing higher business risk (BUSRISK) may reduce the competitiveness of a private firm; consequently, firm performance reduces. Similarly, firms with limited liability corporation status (CORP)have lower firm performance compared to other forms of organisation.

Overall, we document that private firms’ investment opportunities are positively associated with firm performance, and that female ownership positively, and concentrated ownership negatively, moderate the positive association between investment opportunities and firm performance.

Our main analysis uses country-fixed effects to account for country-level omitted variables. However, -fixed effects do not show the specific country-level factors contributing to the association between investment opportunities and firm performance. Therefore, we test the robustness of our findings by including additional country-level variables. More specifically, we control for country-level gross domestic product (GDP); financial development (FINDEV); legal tradition (LAW); general financing constraints (GFC); general corruption constraints (GCORR); judicial constraints (JUDC); and legal enforcement (ENFORCE). We measure all these country-level variables (except for GDP, FINDEV, and LAW) using the WBES questionnaire. After concentrated for these additional country-level factors, we document qualitatively similar results. We report the regression results in Table 5.

Private firms voluntarily decide whether to invest at the highest level of their capacity as they may face financial constraints and lack of pressure as these firms are not public firms. Therefore, self-selection bias may affect our findings. We use Heckman’s (1979) two-stage approach to mitigate self-selection bias. In the first stage, we run a determinant model of a firm’s decision to choose a higher versus a lower level of investment opportunities. The inverse Mills ratio (IMR) is then computed from the first-stage model, with this ratio used in the second-stage model, as shown in Equations (1), (2), and (3). For the first-stage model, we select industry-level investment opportunities (INVOP_IND); firm size (SIZE); firm age (FAGE); foreign ownership (FOROWN); export status (EXPORT); financial constraints (FINCONS); bribes (BUSRISK); legal status (CORP); external dependence (EXTDEP); and innovation (INNOV). Table 6 reports both the first-stage and second-stage regression results. The results suggest that our findings remain the same after controlling for self-selection bias.

The results show that the coefficient of INVOP_IND is positive and statistically significant (β = 3.148, p < 0.01), suggesting that industry-level investment opportunities are an important factor in a private firm’s decision of whether to invest at the highest level of its capacity. Furthermore, we document that firm size (SIZE), firm age (FAGE), export status (EXPORT), and innovation (INNOV) are positively associated with a firm’s decision to utilize its higher-level capacity for investment. Additionally, financial constraints (FINCONS) and external finance (EXTDEP) are negatively associated with a firm’s decision to invest at a higher level of investment opportunities.

As private firms voluntarily decide whether to invest at their highest level of capacity, they are not randomly assigned to treatment or control groups based on making decisions about higher or lower investment opportunities but self-select into these groups. We apply the propensity score matching technique to control for this self-selection bias following prior studies (Bose et al., 2022a, b), where we run our regression models on a matched-pair sample. Firms with higher and lower investment opportunities are matched based on their propensity score, allowing for multivariate analysis to be conducted like regression is performed on a randomized experiment sample (Guo and Fraser, 2015).

Table 7, Panel A reports the results of the probit regression. As expected, the propensity of a firm to choose higher investment opportunities is positively associated with firm size (SIZE), export status (EXPORT), and innovation (INNOV), while being negatively associated with firm age (FAGE), financial constraints (FINCONS), and dependence on external financing (EXTDEP). We match firms with higher INVOP with those with lower INVOP based on the sample’s median and propensity scores, using both the caliper and nearest neighbour matching methods, within a range of 0.01 (Guo and Fraser (2015). This yields a sample of 27,618 firm-year observations for the caliper matching method and 28,555 for the nearest neighbour matching method. Comparing the covariates between the matched groups (Table 7, Panel B), we find no significant differences between matched firm-year observations using either the caliper matching method or the nearest neighbour matching method.