Capital Investments and Stock Returns
K. C. John Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance
Southern Connecticut State University - Department of Economics and Finance
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9951
Firms that substantially increase capital investments subsequently achieve negative benchmark-adjusted returns. The negative abnormal capital investment/return relation is shown to be stronger for firms that have greater investment discretion, i.e., firms with higher cash flows and lower debt ratios, and is shown to be significant only in time periods when hostile takeovers were less prevalent. These observations are consistent with the hypothesis that investors tend to underreact to the empire building implications of increased investment expenditures. Although firms that increase capital investments tend to have high past returns and often issue equity, the negative abnormal capital investment/return relation is independent of the previously documented long-term return reversal and secondary equity issue anomalies.
Number of Pages in PDF File: 40working papers series
Date posted: September 9, 2003
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