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Capital Investments and Stock Returns in Japan

21 Pages Posted: 8 Jun 2009  

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

K. C. John Wei

Hong Kong University of Science & Technology (HKUST)

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Abstract

The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk-based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre-1990 subperiod, there is a positive relation between increased CE and subsequent risk-adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre-1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

Suggested Citation

Titman, Sheridan and Wei, K. C. John and Xie, Feixue, Capital Investments and Stock Returns in Japan. International Review of Finance, Vol. 9, Issue 1-2, pp. 111-131, March/June 2009. Available at SSRN: https://ssrn.com/abstract=1414486 or http://dx.doi.org/10.1111/j.1468-2443.2009.01087.x

Sheridan Titman (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

K.C. John Wei

Hong Kong University of Science & Technology (HKUST)

Clearwater Bay
Kowloon, 999999
Hong Kong

Feixue Xie

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-7788 (Phone)
915-747-6268 (Fax)

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