Capital Investments and Stock Returns

33 Pages Posted: 9 May 2001

See all articles by K.C. John Wei

K.C. John Wei

Hong Kong Polytechnic University

Feixue Xie

Southern Connecticut State University - Department of Economics and Finance

Sheridan Titman

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

Abstract

Firms that spend the most on capital investments relative to their sales or total assets, subsequently achieve negative benchmark-adjusted returns. We consider two hypotheses to explain these returns. The first explanation, that firms artificially increase cash flows to fund investment expenditures, suggests that the negative relation between returns and investment expenditures should be strongest for the most financially constrained firms. The second explanation, that firms that invest a lot tend to be over-investing, suggests that the negative relation between returns and investment expenditures should be strongest for firms with the most financial slack. The evidence tends to support the second explanation. That is, the negative capital investment/return relation is stronger for firms with higher cash flows and lower debt ratios and reverses in the period when firms of this type were subject to hostile takeovers.

Keywords: Investment, stock returns, financial constraints, free cash flow

JEL Classification: G0, G3

Suggested Citation

Wei, Kuo-Chiang (John) and Xie, Feixue and Titman, Sheridan, Capital Investments and Stock Returns (April 2001). Available at SSRN: https://ssrn.com/abstract=268538 or http://dx.doi.org/10.2139/ssrn.268538

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Feixue Xie

Southern Connecticut State University - Department of Economics and Finance ( email )

New Haven, CT 06515
United States

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

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