Does higher investments necessarily reduce stock returns?☆

Huixuan Li and Jing Chen

Pacific-Basin Finance Journal, 2022, vol. 72, issue C

Abstract: Previous studies find corporate investments negatively predict firm performance and stock returns. Using data from the Chinese A-share stock market, we find firms that substantially increase their investments have higher, rather than lower, subsequent stock returns. Such effect persists after controlling for important price factors such as size, value, momentum and turnover. Further analysis shows that this effect is more pronounced among large, low BM, profitable firms and stocks in high-growth industries. We offer a unified explanation for the contradictory findings: The correlation between investment and stock returns depends on whether return to capital is decreasing or increasing. Moreover, we find evidence of increasing returns to capital in last two decades in China with abundant investment opportunities, which implies more investment leads to higher rather than lower profits and consequently higher stock returns.

Keywords: Corporate investment; Investment opportunity; Increasing returns to capital (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000257

DOI: 10.1016/j.pacfin.2022.101730

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