21 Pages Posted: 8 Jun 2009
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: 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
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