Working Paper: NBER ID: w9951
Authors: Sheridan Titman; KC John Wei; Feixue Xie
Abstract: Firms 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.
Keywords: No keywords provided
JEL Codes: G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased capital investments by firms (E22) | Negative stock returns (G12) |
| Firms with higher cash flows and lower debt ratios (G32) | Stronger negative capital investment-return relation (G31) |
| Negative capital investment-return relation (G31) | Independent of previously documented anomalies (Y50) |
| Negative impact of capital investments (G31) | More significant in periods with less hostile takeovers (G34) |