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Cash flow has been major determinant of investment in the most of the studies conducted in the area of finance. However the exact role of cash flow to determine the investment remained ambiguous.This research has been conducted mainly to investigate the relationship between investment and internal generated fund while the information is asymmetric in the environment of Pakistan.The Q model of investment has been used to investigate this relationship. The GMM model has been applied to test the hypothesis by using the balanced panel annual data of Pakistani listed non-financial KSE 100 index firms for the period 2008 to 2013.The empirical analysis includes 100 sample firms with 600 observations.The five measures of asymmetric information (i.e. Tobin?s Q, ownership concentration, firm size, profitability and the financial leverage) have been used in this study.The results derived by using all five measures of asymmetric information confirm the positive and statistically significant relationship between internal finance and firm?s investment when firms have information that is asymmetric.This study explains that investors misperceive the decisions made by firms? managers due to the information gap present among the investors and corporate investors. This misperception about decisions of firms? managers raises the demand of risk premium i.e., discount on new issue of securities by the investors.The increase in risk premium demand results in costly access to external finance.Therefore the firms have to rely on internally generated funds for investment decisions.This study contributes to the investment decisions in the capital markets that are imperfect like Pakistan consisting of information asymmetries. This study also provides guideline to the investors to assess the information present in the capital markets to make investment decisions and to understand the firms? decisions regarding to the new issue of securities and other indirect information attached to the new issue of securities.
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