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Capital Investments and Stock Returns in Japan

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  • Sheridan Titman
  • K.C. John Wei
  • Feixue Xie

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.

Suggested Citation

  • Sheridan Titman & K.C. John Wei & Feixue Xie, 2009. "Capital Investments and Stock Returns in Japan," International Review of Finance, International Review of Finance Ltd., vol. 9(1‐2), pages 111-131, March.
    • Handle: RePEc:bla:irvfin:v:9:y:2009:i:1-2:p:111-131
    DOI: 10.1111/j.1468-2443.2009.01087.x
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    2. Hiroki, Takashi & Iwatsubo, Kentaro & Watkins, Clinton, 2022. "Does firm-level productivity predict stock returns?," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    3. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2016. "Emerging trends in Asia-Pacific finance research: A review of recent influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 66-76.
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    7. Tinaikar, Surjit & Xu, Bo, 2023. "Does competition exacerbate investment inefficiencies? Evidence from Japanese firms," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 35-53.
    8. Islam, Md. Rashidul & Hossain, Monirul Alam & Uddin, Mohammad Shamsu & Bahta, Dawit Teclemariam, 2020. "Does Financial Flexibility foster Investment Efficiency? Evidence from an Emerging Market," Asian Business Review, Asian Business Consortium, vol. 10(2), pages 121-136.
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    10. Adriana S. Cordis & Chris Kirby, 2017. "Capital expenditures and firm performance: evidence from a cross†sectional analysis of stock returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1019-1042, December.

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