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Capital expenditures and firm performance: evidence from a cross†sectional analysis of stock returns

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  • Adriana S. Cordis
  • Chris Kirby

Abstract

Using a simple two†period model of investment, we show that there should be a nonlinear relation between a firm's investment†to†capital ratio and its subsequent stock returns. This prediction finds substantial empirical support. The evidence indicates that the slope of the investment function is negative at low investment levels, close to zero at intermediate investment levels and negative at high investment levels. Our results, which are robust to the use of narrowly†and broadly†defined measures of capital investment, pose a challenge to the hypothesis that the negative cross†sectional correlation between investment and stock returns is attributable to some sort of overinvestment phenomenon.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:acctfi:v:57:y:2017:i:4:p:1019-1042
    DOI: 10.1111/acfi.12193
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