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Capital Investments and Stock Returns in Japan


  • * The authors appreciate helpful comments from seminar participants at the Hong Kong University of Science and Technology, National Dong Hwa University, University of Texas at El Paso, the APFA/PACAP/FMA Finance Conference in Tokyo, and the FMA meetings in San Antonio, Texas. The authors also thank Dr. Virginia Unkefer for editorial assistance. Sheridan Titman and John Wei acknowledge the financial support from an RGC Competitive Earmarked Research Grant of the Hong Kong Special Administration Region, China (HKUST6014/99H).

Sheridan Titman
Department of Finance
University of Texas at Austin
Austin, Texas, USA


The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk-based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre-1990 subperiod, there is a positive relation between increased CE and subsequent risk-adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre-1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.