scholarly journals Capital Investments and Stock Returns

2004 ◽  
Vol 39 (4) ◽  
pp. 677-700 ◽  
Author(s):  
Sheridan Titman ◽  
K. C. John Wei ◽  
Feixue Xie
Keyword(s):  
Stock Returns ◽  
Capital Investment ◽  
Cash Flows ◽  
Capital Investments ◽  
Equity Issue ◽  
Hostile Takeovers ◽  
Empire Building ◽  
Investment Return ◽  
Return Reversal

AbstractFirms 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.

The value relevance of capital expenditures and the business cycle

2018 ◽  
Vol 35 (3) ◽  
pp. 386-406 ◽  
Author(s):  
Sungsoo Kim ◽  
Brandon byunghwan Lee
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Value Relevance ◽  
Financial Data ◽  
Capital Expenditures ◽  
Capital Investments ◽  
Content Type ◽  
Market Participants ◽  
Business Conditions

Purpose This paper aims to clarify the relationship between corporate capital investments and business cycles. Specifically, a major purpose of this paper is to investigate whether there are inherent differences in corporate investment patterns and whether the stock market exhibits different reactions to the value relevance of capital expenditures across different business conditions. Design/methodology/approach The authors use pooled ordinary least square regressions with archival stock price data and financial data from CRSP and Compustat. The authors regress buy and hold returns on the main test variables and control variables that are identified to be related to the investment literature. Findings This paper provides empirical evidence that US firms’ capital expenditures are more value relevant to capital market participants during expansionary business cycles and, conversely, less value relevant during contractionary business cycles. This evidence validates previous literature that has found the information content of capital expenditures to be uncertain and cyclical in nature. Research limitations/implications The main limitation of this paper, as with other work dealing with stock returns and archived financial data, is that the authors try to match stock returns with contemporaneous financial data in an association study context. The precise mapping in this methodology is always challenging and has been questioned in the literature. Practical implications This paper has various implications for capital market participants. Capital expenditures are good news for investors, but they will make a better investment when firms make capital investments during an expansionary period. Creditors deciding whether to extend credit to firms would benefit from more accurate information on the viability of long-term investment. The results also suggest to creditors that an excessive number of loans during the contractionary period may be suboptimal because firms’ returns on capital investment are smaller in that period than in the expansionary period. Social implications Given the valuation of implications of long-term capital investments across different business conditions, this paper sheds light on asset allocations for mutual funds, institutional investors who are entrusted with investors’ investments including retirement funds. Originality/value This paper fulfils an identified need to study how capital investments are valued differently across different business conditions.

scholarly journals Capital structure, capital investment and profitability among Malaysian listed firms

2018 ◽  
Vol 7 (4.9) ◽  
pp. 14
Author(s):  
Yamunah Vaicondam ◽  
Ramakrishnan Ramakrishnan
Keyword(s):  
Capital Structure ◽  
Capital Investment ◽  
Moderating Effect ◽  
The Other ◽  
Capital Investments ◽  
Significant Positive Effect ◽  
Listed Firms ◽  
Empire Building ◽  
The Relationship ◽  
Positive Effect

Capital investments are referred as a critical managerial decision on firm's fixed asset for generating profitability. However, the empirical finding shows that not every capital investment has a significant positive effect on profitability. Literature indicates mixed results of examining the capital investment relationship with firm's profitability, which vary in respects to the debt structure. On the other hand, strong government reinforcement has pushed Malaysia up as one of the top ten countries with robust private capital investment in the year 2004. Since the capital investments are typically irreversible and hypothesized as profit generator, the first aim of this study is to examine the effect of the capital investment on the firm's profitability across firms and sectors. The second aim is to examine the moderating effect of capital structure on the relationship between capital investment and profitability across firms and sectors. This study utilized pooled ordinary least squares and fixed effect analysis across 708 non-financial Malaysian listed firms. The unbalanced datasets for the period 2001 to 2015 were employed to check the robustness of these results. This study suggested that capital investment has a strong significant positive effect on profitability measurements across Malaysian listed firms in non-financial sectors. On the other hand, the significant negative moderating effect of capital structure on the relationship between capital investment and return on capital across Malaysian listed firms reflected the perspective of empire building theory. In addition, the independent sample test engaged across sectors affirmed that moderating effect of capital structure are different across sectors. Thus, this study concluded the existence of moderating effect of capital structure on the relationship between capital investment and profitability. This study addressed the knowledge gap on the moderating effect of capital structure based on empire building theory.  

scholarly journals Russian capital investment dynamics as an economic transformation factor

2019 ◽  
Vol 89 (10) ◽  
pp. 981-992
Author(s):  
Aleksey V. Alekseev ◽  
Natalia N. Kuznetsova
Keyword(s):  
Global Economy ◽  
Capital Investment ◽  
Large Scale ◽  
Economic Transformation ◽  
Capital Investments ◽  
Economic Activities ◽  
Investment Projects ◽  
Use Of Resources ◽  
Investment Process

By comparing Russian and American capital investment programs according to gross and per capita indexes, this article analyzes capital investments long-term dynamics in economic activities in general and manufacturing in particular. Results showed that Russian economic growths quality, determined by its 2000 capital investment structure did not correspond with the national economys long-term development aims. Moreover, investment activitys current fading appears consequent to that periods inappropriate investment politics. The existing Russian investment system aims to incorporate its economy into the global economy as a supplier of natural and, partly, agricultural resources, thus dooming manufacturing to stagnation at best. The authors reveal that activation of industrial politics, established on a fundamental power-of-the-state approach in the investment process, based on long-term strategic interests and the potential of market forces (namely, efficiency use of resources) allows launching large-scale investment projects to provide favorable conditions for creating an innovative national economy.

scholarly journals Risk analysis and evaluation of capital investment projects

2001 ◽  
Vol 4 (2) ◽  
pp. 398-411 ◽  
Author(s):  
J. H. Hall
Keyword(s):  
Risk Analysis ◽  
South African ◽  
Capital Investment ◽  
Cash Flows ◽  
Capital Investments ◽  
Investment Projects ◽  
Analysis And Evaluation ◽  
Subjective Estimates ◽  
The Empirical Analysis ◽  
Risk Concept

In determining the feasibility of projects where capital investments are concerned, various methods are used. The focus of these methods is on return per se, so it is often asked to what extent any of these methods take the risk concept into account. The main objective of this study was to investigate the importance of risk with regard to capital investment projects. Secondly, with the aid of an empirical study, the study tried to establish whether risk is incorporated when South African companies evaluate capital investment projects. The empirical analysis indicated that risk analysis and evaluation in practice are to a large extent neglected by South African companies. It was found that nearly a quarter of companies estimate their annual cash flows using management subjective estimates alone.

scholarly journals The Importance of Capital Investment and Debt Financing in Deriving Shareholders’ Value; A Literature Survey

2021 ◽  
pp. 22-30
Author(s):  
Muzammil Hanif ◽  
Mohd Norfian Alifiah
Keyword(s):  
Decision Making ◽  
Capital Investment ◽  
Cash Flows ◽  
Debt Financing ◽  
Strategic Decision ◽  
Capital Investments ◽  
Managerial Decision ◽  
Financing Decisions ◽  
Free Cash Flows ◽  
Interest Payments

Shareholders’ value is the most important goal and an integral part of the companies’ strategic decision-making process. When a corporate performs well and creates value for its shareholders, it benefits the whole economy. The past studies concluded that efficient decision making in the areas of capital investments and debt financing can ensure high financial performance and shareholders’ value creation. This paper thoroughly reviews the literature on impact of capital investment and debt financing decisions on shareholders’ value. Capital investment is a very important managerial decision because it increases company's economic profit. However, past studies have found that not every time the capital investment results in increasing the value as it may vary with the level of investment. Moreover, debt financing lowers the free cash flows due to the payment of fixed interest payments, thus lowering shareholders' return and value. Therefore, this paper recommends the need of further research to better understand the effect of capital investment and debt financing decisions on shareholders’ value.

scholarly journals SEQUENTIAL CAPITAL INVESTMENT DECISION MAKING UNDER EXTREME CASH FL OW SITUATIONS: EVIDENCE USING MONTE CARLO SIMULATION

2015 ◽  
Vol 16 (5) ◽  
pp. 877-900 ◽  
Author(s):  
Wenqing Zhang ◽  
Prasad Padmanabhan ◽  
Chia-Hsing Huang
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Capital Investment ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Present Value ◽  
Short Term ◽  
Value Analysis

Uncertainty influences a decision maker's choices when making sequential capital investment decisions. With the possibility of extremely negative cash inflows, firms may need to curtail operations significantly. Traditional Net Present Value analysis does not allow for efficient management of these problems. In addition, firm managers may behave irrationally by accepting negative Net Present Value projects in the short term. This paper presents a Monte Carlo simulation based model to provide policy insights on how to incorporate extreme cash flows and manager irrationality scenarios into the capital budgeting process. This paper presents evidence that firms with irrational managers and experiencing extremely negative cash flows may, under certain conditions, reap long term rewards associated with the acceptance of negative Net Present Value projects in the short term. These benefits are largest if cost ratios (discount rates) are small, or investment horizons are high. We argue that acceptance of short term negative Net Present Value projects implies the purchase of a long term real option which can generate positive long term cash flows under certain conditions.

scholarly journals Determinants of Working Capital Investment in South Africa: Evidence from Selected JSE-Listed Firms

2014 ◽  
Vol 6 (7) ◽  
pp. 569-580 ◽  
Author(s):  
Farai Kwenda
Keyword(s):  
Capital Investment ◽  
Stock Exchange ◽  
Generalized Method Of Moments ◽  
Cash Flows ◽  
Adjustment Process ◽  
Capital Investments ◽  
Working Capital ◽  
Listed Firms ◽  
Johannesburg Stock Exchange ◽  
State Of The Economy

This paper analyses the determinants of working capital investments of 92 companies listed on the Johannesburg Stock Exchange (JSE) over the period 2001-2010. Working capital management has grown in significance from being a survival issue to a strategic and competitive tool. Using the Generalized Method of Moments estimation, the study found that firms pursue target levels of current assets. However, the adjustment process is relatively slow. The study found that leverage, short-term finance and fixed investment significantly influence the level of working capital investment, while operating cash flows, state of the economy, firm size and sales growth rate were found to be statistically insignificantly related to working capital investment. The study recommends that managers understand the driving factors of working capital investment since working capital investment influences the value of the firm.

scholarly journals Cultural Dimensions and Sustainable Stock Exchanges Returns in the Asian Region

2021 ◽  
Vol 22 (1) ◽  
pp. 133-149
Author(s):  
Susilo Nur Aji Cokro Darsono ◽  
Wing-Keung Wong ◽  
Nguyen Tran Thai Ha ◽  
Hafsah Fajar Jati ◽  
Diah Setyawati Dewanti
Keyword(s):  
Stock Returns ◽  
Power Distance ◽  
Cultural Dimensions ◽  
Least Square ◽  
Asian Countries ◽  
Market Returns ◽  
Asian Region ◽  
Investment Return ◽  
Sustainable Investment

Research aims: The aim of this paper is to examine the effect of four cultural dimensions such as power distance index (PDI), individualism (IDV), uncertainty avoidance index (UAI), and long-term orientation (LTO) on the sustainable investment return in Asian sustainable stock exchanges.Design/Methodology/Approach: Quantitative research method was applied for this research. Monthly sustainable stock indices from seven Asian countries for the period 2015-2019 were considered. This research employed the Ordinary Least Square (OLS) regression and Feasible Generalized Least Square (FGLS) regression with id and time fixed effect.Research findings: The outcomes of our empirical investigation underlined the fact that: (i) an increase in power distance (PDI) would increase the market returns in the Asian region; (ii) individualism (IDV) had a positive and significant impact on the market returns, and the increase of individualism in the Asian countries would lead to the higher sustainable stock returns; (iii) increase in the uncertainty of avoidance (UAI) by investors in the Asian region would lead to the higher stock returns; (iv) the long term orientation (LTO) had a significant and positive impact on market returns. It showed that if the investor had a long-term orientation on the sustainable stock exchange in the Asian region, it would lead to increased stock returns.Theoretical contribution/Originality: This research's theoretical contribution is to present the causal relations of cultural differences on the sustainable investment return in the Asian region.Practitioner/Policy implication: This research’s implication is to increase the concern of individual investors, portfolio managers, and investment companies regarding the cultural dimension effect on sustainable investment.Research limitation/Implication: The limitations still exist in this research, such as: (1) limited data for sustainable stock indices in the Asian region; (2) this research mainly focused on four cultural dimensions instead of six dimensions in Hofstede's model; (3) the future research should include the control variables and some other financial variables related with the sustainable investment.

Solar Renewable Energy Credit Price Volatility and Investment Returns: Have Policies Stranded Capital Investment?

Commonwealth ◽  
2017 ◽  
Vol 19 (1) ◽  
Author(s):  
Somayeh Youssefi ◽  
Patrick L. Gurian
Keyword(s):  
Solar Energy ◽  
Capital Investment ◽  
Supply And Demand ◽  
Price Volatility ◽  
The United States ◽  
Investment Model ◽  
Capital Investments ◽  
Demand Model ◽  
Market Prices ◽  
Investment Returns

Pennsylvania is one of a number of U.S. states that provide incentives for the generation of electricity by solar energy through Solar Renewal Energy Credits (SRECs). This article develops a return on investment model for solar energy generation in the PJM (mid-­Atlantic) region of the United States. Model results indicate that SREC values of roughly $150 are needed for residential scale systems to break even over a 25-­year project period at 3% interest. Market prices for SRECs in Pennsylvania have been well below this range from late 2011 through the first half of 2016, indicating that previous capital investments in solar generation have been stranded as a result of steep declines in the value of SRECs. A simple conceptual supply and demand model is developed to explain the sharp decline in market prices for SRECs. Also discussed is a possible policy remedy that would add unsold SRECs in a given year to the SREC quota for the subsequent year.

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