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The Effect of Investment Inefficiency on Expected Returns

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  • Jains P. Chacko
  • Lakshmi Padmakumari

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

Suggested Citation

  • Jains P. Chacko & Lakshmi Padmakumari, 2023. "The Effect of Investment Inefficiency on Expected Returns," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(3), pages 272-296, September.
    • Handle: RePEc:sae:emffin:v:22:y:2023:i:3:p:272-296
    DOI: 10.1177/09726527231165365
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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