We set out in this study to examine the relationship between the financing decisions of firms and level of inefficient investment. We demonstrate that firms with (non-)valuable investment opportunities, the actual level of investment invariably tends to less (more) than the optimal level which problem of under-investment (over-investment). We carry out two types of empirical tests, analyzing the level of investment for maximum firm value (dependent upon the quality of the investment opportunities) so as to gauge the relative magnitude of the investment inefficiencies effects. Firstly, from an examination of the relative changes in the investment intensity of firms following financing decisions, we find that those firms issuing equity or dual tend to under-investment, and that this is largely dependent upon the valuable investment opportunities available to them. Secondly, we examine different financing decisions in an attempt to determine whether such decisions represent the underlying cause of such inefficient investment.

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