Corporate Investment and Value Creation

Abstract:     
This study explores the value creation implications of corporate investment through future earnings. I develop parsimonious measures for the extent of a firm making too low or too high capital investment, controlling for investment opportunities. Using these measures, I document that both low- and high-investing firms subsequently realize poor earnings, controlling for profitability of existing assets. The evidence is consistent with suboptimal value creation following inefficient investment. The investment effect on future earnings persists for up to five years, suggesting that firms forgoing profitable opportunities continually give away sizable profits, while firms undertaking value-destroying projects fail to downscale or terminate at least some of them.

Number of Pages in PDF File: 52

Keywords: capital investment, investment inefficiency, earnings

JEL Classification: G31

working papers series