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Capital Investments and Stock Returns

40 Pages Posted: 9 Sep 2003  

K.C. John Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance

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)

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Date Written: September 2003

Abstract

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.

Suggested Citation

Wei, K.C. John and Xie, Feixue and Titman, Sheridan, Capital Investments and Stock Returns (September 2003). NBER Working Paper No. w9951. Available at SSRN: https://ssrn.com/abstract=441584

Kuo-Chiang (John) Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852 2766 4953 (Phone)
852 2330 9845 (Fax)

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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