scholarly journals What's Good for GM...? Using Auto Industry Stock Returns to Forecast Business Cycles and Test the Q-Theory of Investment

1996 ◽  
Author(s):  
Gregory R. Duffee ◽  
Stephen D. Prowse
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Auto Industry ◽  
Q Theory ◽  
Good For

The value relevance of capital expenditures and the business cycle

2018 ◽  
Vol 35 (3) ◽  
pp. 386-406 ◽  
Author(s):  
Sungsoo Kim ◽  
Brandon byunghwan Lee
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Value Relevance ◽  
Financial Data ◽  
Capital Expenditures ◽  
Capital Investments ◽  
Content Type ◽  
Market Participants ◽  
Business Conditions

Purpose This paper aims to clarify the relationship between corporate capital investments and business cycles. Specifically, a major purpose of this paper is to investigate whether there are inherent differences in corporate investment patterns and whether the stock market exhibits different reactions to the value relevance of capital expenditures across different business conditions. Design/methodology/approach The authors use pooled ordinary least square regressions with archival stock price data and financial data from CRSP and Compustat. The authors regress buy and hold returns on the main test variables and control variables that are identified to be related to the investment literature. Findings This paper provides empirical evidence that US firms’ capital expenditures are more value relevant to capital market participants during expansionary business cycles and, conversely, less value relevant during contractionary business cycles. This evidence validates previous literature that has found the information content of capital expenditures to be uncertain and cyclical in nature. Research limitations/implications The main limitation of this paper, as with other work dealing with stock returns and archived financial data, is that the authors try to match stock returns with contemporaneous financial data in an association study context. The precise mapping in this methodology is always challenging and has been questioned in the literature. Practical implications This paper has various implications for capital market participants. Capital expenditures are good news for investors, but they will make a better investment when firms make capital investments during an expansionary period. Creditors deciding whether to extend credit to firms would benefit from more accurate information on the viability of long-term investment. The results also suggest to creditors that an excessive number of loans during the contractionary period may be suboptimal because firms’ returns on capital investment are smaller in that period than in the expansionary period. Social implications Given the valuation of implications of long-term capital investments across different business conditions, this paper sheds light on asset allocations for mutual funds, institutional investors who are entrusted with investors’ investments including retirement funds. Originality/value This paper fulfils an identified need to study how capital investments are valued differently across different business conditions.

Business cycles and the pre-holiday effect in stock returns

1994 ◽  
Vol 4 (3) ◽  
pp. 171-174 ◽  
Author(s):  
Kartono Liano ◽  
Larry R. White
Keyword(s):  
Business Cycles ◽  
Stock Returns ◽  
Holiday Effect

Market Development and the Asset Growth Effect: International Evidence

2013 ◽  
Vol 48 (5) ◽  
pp. 1405-1432 ◽  
Author(s):  
Sheridan Titman ◽  
K. C. John Wei ◽  
Feixue Xie
Keyword(s):  
Financial Markets ◽  
Stock Returns ◽  
Growth Effect ◽  
Market Development ◽  
International Evidence ◽  
Q Theory ◽  
Asset Growth ◽  
Financial Market Development ◽  
Cross Country ◽  
The Cost

AbstractA number of studies of U.S. stock returns document what is referred to as the investment or asset growth effect. Specifically, firms that increase investment or total assets subsequently earn lower risk-adjusted returns. This study finds substantial cross-country differences in the asset growth effect. In particular, the asset growth effect is stronger in countries with more developed financial markets, but it does not seem to be associated with corporate governance or the costs of trading. Overall, the evidence is consistent with a q-theory where financial market development captures either managers’ willingness or ability to align investment expenditures to the cost of capital, but it is inconsistent with the hypothesis that the asset growth effect is due to bad governance and overinvestment.

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