Capital expenditures and firm performance: evidence from a crossâ€ sectional analysis of stock returns
Adriana S. Cordis and
Accounting and Finance, 2017, vol. 57, issue 4, 1019-1042
Using a simple twoâ€ period model of investment, we show that there should be a nonlinear relation between a firm's investmentâ€ toâ€ capital ratio and its subsequent stock returns. This prediction finds substantial empirical support. The evidence indicates that the slope of the investment function is negative at low investment levels, close to zero at intermediate investment levels and negative at high investment levels. Our results, which are robust to the use of narrowlyâ€ and broadlyâ€ defined measures of capital investment, pose a challenge to the hypothesis that the negative crossâ€ sectional correlation between investment and stock returns is attributable to some sort of overinvestment phenomenon.
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