The Effect of Investment Inefficiency on Expected Returns

Jains P. Chacko and Lakshmi Padmakumari

Journal of Emerging Market Finance, 2023, vol. 22, issue 3, 272-296

Abstract: The majority of Indian firms have a promoter and family-owner-dominated ownership structure; therefore, the agency problem prevailing in such a setting would be the conflict of interest between the majority and minority shareholders. This motivated us to examine the adverse effect of not investing at the level implied by the firms’ characteristics, termed investment inefficiency, on the ex-ante measure of expected returns, the implied cost of capital. Our study finds a positive relationship between investment inefficiency and expected returns in the baseline results estimated using pooled ordinary least squares (OLS) and the robustness results estimated using a two-step generalized method of moments (GMM). The sample of the study consists of listed firms in India from 2016 to 2021. JEL Codes: G11, G31

Keywords: Corporate investment; agency cost; financial constraints; ex ante cost of capital; implied cost of equity capital (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:22:y:2023:i:3:p:272-296

DOI: 10.1177/09726527231165365

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