Abnormal Investment and Firm Performance

Siqi Liu; Chao Yin; Yeqin Zeng

doi:10.1016/j.irfa.2021.101886

Abnormal Investment and Firm Performance

Siqi Liu, Chao Yin, Yeqin Zeng

Queen's Business School (QBS)

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Abstract

We find a negative relation between abnormal investment and future stock performance. Such a negative relation is mainly driven by under-investment, not over-investment. Our results are robust to various estimation methods and investment models. Both delayed market reaction and agency issues may lead to the apparently anomalous return predictability of under-investment. First, market investors may not react promptly to the fundamental information contained in under-investment about a firm's future profitability, asset growth, and financial distress probability. Second, the negative relation between under-investment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs.

Original language	English
Article number	101886
Journal	International Review of Financial Analysis
Volume	78
Early online date	13 Sept 2021
DOIs	https://doi.org/10.1016/j.irfa.2021.101886
Publication status	Published - Nov 2021

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Abnormal Investment and Firm Performance
Copyright 2021 Elsevier. This manuscript is distributed under a Creative Commons Attribution-NonCommercial-NoDerivs License (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits distribution and reproduction for non-commercial purposes, provided the author and source are cited.
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Cite this

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title = "Abnormal Investment and Firm Performance",

abstract = "We find a negative relation between abnormal investment and future stock performance. Such a negative relation is mainly driven by under-investment, not over-investment. Our results are robust to various estimation methods and investment models. Both delayed market reaction and agency issues may lead to the apparently anomalous return predictability of under-investment. First, market investors may not react promptly to the fundamental information contained in under-investment about a firm's future profitability, asset growth, and financial distress probability. Second, the negative relation between under-investment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs.",

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AB - We find a negative relation between abnormal investment and future stock performance. Such a negative relation is mainly driven by under-investment, not over-investment. Our results are robust to various estimation methods and investment models. Both delayed market reaction and agency issues may lead to the apparently anomalous return predictability of under-investment. First, market investors may not react promptly to the fundamental information contained in under-investment about a firm's future profitability, asset growth, and financial distress probability. Second, the negative relation between under-investment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs.

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DO - 10.1016/j.irfa.2021.101886

M3 - Article

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JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

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Abnormal Investment and Firm Performance

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