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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Capital Investment and Stock Returns: The European Evidence
Organization Unit
  • Quoc Fu Ha
  • Thorsten Hens
  • Alexandre Ziegler
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 50
Date September 2016
Zusammenfassung Studies on the US stock market show that investment and stock returns have a negative relation to each other. With a little manipulation to the dividend discount model, one can derive a negative relation between investment and stock returns. Another argument for the negative relation is that firms over-invest and thus experience lower subsequent stock return. However, given that there is little literature regarding this matter for the European stock market, this master thesis aims to provide further empirical evidence for it. Specifically, it focuses on abnormal capital investment, which is constructed from the preceding four years’ capital expenditure to show over-investment. The stocks are sorted according to the investment measure into portfolios to isolate the return difference between firms with different investment levels. The investment measure employed is abnormal capital investment. The portfolio returns are controlled for size, book-to-market and momentum through benchmark portfolios. To control the portfolio returns for risk, regressions are run with the Carhart four-factor model. A spread portfolio that has a long position in low investment portfolios and a short position in high investment portfolios indicates a negative investment and stock return relation if it is positive and significant. The returns of the portfolios formed after the intensity of the capital expenditure growth do not show significant returns attributable to it after adjusting for benchmark returns to the characteristics dimensions size, book-to-market and momentum. Hence, the spread portfolio return that would have captured the difference between high investment portfolio and low investment portfolio returns is also insignificant. Thus, the European stock market does not experience a negative abnormal capital investment and stock return relation due to over-investment. Nonetheless, sorting the stocks after an alternative investment proxy, the growth of assets, the portfolio returns support a negative investment and stock return relation for the European stock market.
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