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Capital Investments and Stock Returns in Japan

Capital Investments and Stock Returns in Japan ABSTRACT The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk‐based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre‐1990 subperiod, there is a positive relation between increased CE and subsequent risk‐adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre‐1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Review of Finance Wiley

Capital Investments and Stock Returns in Japan

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References (39)

Publisher
Wiley
Copyright
© 2009 The Authors. Journal compilation © International Review of Finance Ltd. 2009
ISSN
1369-412X
eISSN
1468-2443
DOI
10.1111/j.1468-2443.2009.01087.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk‐based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre‐1990 subperiod, there is a positive relation between increased CE and subsequent risk‐adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre‐1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

Journal

International Review of FinanceWiley

Published: Mar 1, 2009

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