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Abnormal investment and firm performance

Siqi Liu, Chao Yin and Yeqin Zeng

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: We find a negative relation between abnormal investment and future stock performance. Such a negative relation is mainly driven by under-investment, not over-investment. Our results are robust to various estimation methods and investment models. Both delayed market reaction and agency issues may lead to the apparently anomalous return predictability of under-investment. First, market investors may not react promptly to the fundamental information contained in under-investment about a firm’s future profitability, asset growth, and financial distress probability. Second, the negative relation between under-investment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs.

Keywords: Investment; Abnormal investment; Stock performance; Market efficiency; Agency costs (search for similar items in EconPapers)
JEL-codes: G12 G14 G30 M4 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.irfa.2021.101886

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