The investment decisions are very important for investors as it directly affects the firm's future profitability and shareholder's wealth. Firm managers are involved in making inefficient investment decisions in imperfect capital markets. This study aims to examine how the inefficient investment decisions influence the firm performance after controlling for the financial factors. The two steps System Generalized method of moments is used to examine the impact of investment distortion on firm performance. The empirical analysis is based on unbalanced annual panel data set of a sample of 324 non-financial firms listed on the Pakistan Stock Exchange for the period 2015 to 2017. The results show that investment distortion is negatively affecting the performance of non-financial firms in Pakistan; irrespective of the proxy used to measure the firm performance. These results support the information asymmetry theory and agency theory, which explains why managers are involved in making sub-optimal investment decisions at the cost of shareholders' wealth and why their inefficient investment decisions can damage the value of the firm.