Market response and future performance of inefficient investment: Over-investment or under-investment
-
Author(s)Juniarti JuniartiLink to ORCID Index: https://orcid.org/0000-0003-0025-4660
,
Yulius Jogi Christiawan
,
Hendri KwistianusLink to ORCID Index: https://orcid.org/0000-0002-0329-0491
-
DOIhttp://dx.doi.org/10.21511/imfi.19(4).2022.12
-
Article InfoVolume 19 2022, Issue #4, pp. 146-159
- Cited by
- 433 Views
-
94 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
There have been many studies on the market response to investment spending, but only a few have examined the market response to the issue of over-investment or under-investment. This study examines the effect of the issue on market response and future financial performance. The sample includes large-cap companies listed on the Indonesia Stock Exchange (IDX) for 2016–2021. Samples must have at least 120 active trading days for each year. Two hundred and thirty-two observations meet the qualifications. This study adopts the investment inefficiency model developed by previous studies to measure over-investment or under-investment. Residual inefficient investment models are used as over-investment or under-investment scores, in addition to the dummy of the residual category. Market response is measured by cumulative abnormal returns (CAR), market capitalization (MCAP), and market-to-book value (MTB).
Meanwhile, a firm’s performance uses return on assets (ROA) and return on equity (ROE). The results show that the coefficient of the inefficient investment variable, using both the residual value and the dummy variable, shows a negative direction, which means the market responds negatively to over-investment or under-investment. However, the value of t is significant at the <0.01 level on the market response variable as measured by MTB, but not significant for the other two proxies. Thus, hypothesis 1 is supported, although not for all market response proxies. The value of the inefficient investment coefficient also shows a negative direction when testing hypothesis 2 and is significant at the <0.1 level. These results are consistent with future performance variables measured by ROA and ROE.
Acknowledgment
The study was supported by PDUPT (Higher Education Primary Research Grant) from the Ministry of Education, Culture, Research and Technology, Government of Indonesia.
- Keywords
-
JEL Classification (Paper profile tab)M21, M41, G32
-
References48
-
Tables7
-
Figures0
-
- Table 1. Variable definition
- Table 2. Mean-difference between over-invest and under-invest
- Table 3. Descriptive statistics (CAR, MCAP, MTB, CAPEX, INVEFF) by sector
- Table 4. Descriptive statistics (FSIZE, ASSGRT, DER, FCF, ROA) by sector
- Table 5. Descriptive statistics (ROE, PUBOWN, SALESIC) by sector
- Table 6. Market response to inefficient investment
- Table 7. Future financial performance of investment inefficiency
-
- Abarbanell, J. S., & Bushee, B. J (1997). Fundamental analysis, future earnings, and stock prices. Journal of Accounting Research, 35(1), 1-24.
- Akbar, S., Shah, S. Z. A., & Saadi, I. (2008). Stock market reaction to capital expenditure announcements by UK firms. Applied Financial Economics, 18(8), 617-627.
- Alkaraan, F., & Northcott D. (2006). Strategic capital investment decision-making: a role for emergent analysis tools? A study of practice in large UK manufacturing companies. The British Accounting Review, 38(2), 149-173.
- Bae, J., Biddle, G. C., & Park, C. W. (2018). Voluntary Capex guidance, analyst feedback and capital investment efficiency (Working paper). Erasmus University, University of Melbourne, and University of Hong Kong.
- Bar-Yossef, S., J. Callend, & Livnat, J. (1987). Autoregressive Modeling of Earnings Investment Causality. Journal of Finance, 42, 11-28.
- Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2-3), 112-31.
- Brailsford, J. T., & Yeoh, D. (2004). Agency problems and capital expenditure announcements. The Journal of Business, 77(2), 223-256.
- Bryan, S. H. (1997). Incremental information content of required disclosures contained in management discussion and analysis. The Accounting Review, 72, 285-301.
- Burton, B. M., Lonie, A. A., & Power, D. M. (1999). The stock market reaction to investment announcements: the case of individual capital expenditure projects. Journal of Business Finance & Accounting, 26(5-6), 681-708.
- Burton, B. (2005). Concurrent capital expenditure and the stock market reaction to corporate alliance announcements. Applied Financial Economics, 15(10), 715-729.
- Cartney, S. M. (2004). The use of usefulness: An examination of the user needs approach to the financial reporting conceptual framework. The Journal of Applied Accounting Research, 7(2), 15-21
- Chen, I. F., & Chang, S. C. (2020). Spillover effects of capital expenditure announcements within business groups. British Journal of Management, 31(4), 709-727.
- Chen, M. A., Greene, D. T., & Owers, J. E. (2015). The costs and benefits of clawback provisions in CEO compensation. The Review of Corporate Finance Studies, 4(1), 108-154.
- Choi, J. K., Hann, R. N., Subasi, M., & Zheng, Y. (2020). An Empirical Analysis of Analysts’ Capital Expenditure Forecasts: Evidence from Corporate Investment Efficiency. Contemporary Accounting Research, 37(4), 2615-2648.
- Chung, K. H., Wright, P., & Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decisions. Journal of Banking & Finance, 22(1), 41-60.
- Dandago, K.I, & Hassan, N.I. (2013). Decision usefulness approach to financial reporting: A Case for Malaysian Internal Revenue Board. Asian Economic and Financial Review, 3(6), 772-784.
- Gan, H. (2019). Does CEO managerial ability matter? Evidence from corporate investment efficiency. Review of Quantitative Finance and Accounting, 52(4), 1085-1118.
- Goodman, T. H., Neamtiu, M., Schroff, N., & White, H. D. (2014). Management forecast quality and capital investment decisions. The Accounting Review, 89(1), 331-65.
- Hou, T. C. T. (2019). The relationship between corporate social responsibility and sustainable financial performance: Firm-level evidence from Taiwan. Corporate Social Responsibility and Environmental Management, 26(1), 19-28.
- Jensen, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review (May), 323-329.
- Jiang, C. H., Chen, H. L. T., & Huang, Y. S. (2006). Capital expenditures and corporate earnings: Evidence from the Taiwan stock exchange. Managerial Finance, 32, 853-861.
- Jones, E. J., Danbolt, J., & Hirst, I. (2004). Company investment announcements and the market value of the firm. European Journal of Finance, 10(5), 437-452.
- Kaur, P., & Kaur, R. (2019). Effect of strategic investment decisions on value of the firm: Evidence from India. Paradigm, 23(1), 1-19.
- Kerstein, J., & Kim, S. (1995). The incremental information content of capital expenditures. The Accounting Review, 70(3), 513-26.
- Kim, S., Saha, A., & Bose, S. (2021). Do capital expenditures influence earnings performance: Evidence from loss-making firms. Accounting & Finance, 61, 2539-2575.
- Kumar, P., & Li, D. (2013). Capital investment, option generation, and stock returns. The Journal of Finance, 71, 2059-2094.
- Marito, B. C., & Sjarif, A. D. (2020). The impact of current ratio, debt to equity ratio, return on assets, dividend yield, and market capitalization on stock return (Evidence from listed manufacturing companies in Indonesia Stock Exchange). Economics, 7(1), 10-16.
- McConnell, J. J., & Muscarella, C. J. (1985). Corporate capital expenditure decisions and the market value of the firm. Journal of Financial Economics, 14, 399-422.
- Markopoulou, M. K., & Demetrios L. Papadopoulos (2009). Capital structure signaling theory: evidence from the Greek stock exchange. Portuguese Journal of Management Studies, XIV(3), 217-238.
- McAndrew, F. T. (2021). Costly signaling theory. Encyclopedia of Evolutionary Psychological Science, 1525-1532.
- Moser, P., Isaksson, O., Okwir, S., & Seifert, R. W. (2019). Manufacturing management in process industries: The impact of market conditions and capital expenditure on firm performance. IEEE Transactions on Engineering Management, 68(3), 810-822.
- Naeem, K., & Li, M. C. (2019). Corporate investment efficiency: The role of financial development in firms with financing constraints and agency issues in OECD non-financial firms. International Review of Financial Analysis, 62, 53-68.
- Navissi, F., Sridharan, V. G., Khedmati, M., Lim, E. K., & Evdokimov, E. (2017). A business strategy, over-(under-) investment, and managerial compensation. Journal of Management Accounting Research, 29(2), 63-86.
- Nguyen Trong, N., & Nguyen, C. T. (2021). Firm performance: the moderation impact of debt and dividend policies on over-investment. Journal of Asian Business and Economic Studies, 28(1), 47-63.
- Ou, J., (1990). The information content of non-earnings accounting numbers as earnings predictors. Journal of Accounting Research, 28, 144-163.
- Parveen, S., Satti, Z. W., Subhan, Q. A., & Jamil, S. (2020). Exploring market overreaction, investors’ sentiments, and investment decisions in an emerging stock market. Borsa Istanbul Review, 20(3), 224-235.
- Penman, S. H. (1996). The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth. Journal of Accounting Research, 34(2), 235-259.
- Qandhari, S. G. A., Khan, M. M. S., & Rizvi, W. (2016). The relationship between cash flow and capital expenditure in the sugar industry of Pakistan. The Journal of Developing Areas, 50(6), 341-353.
- Reinganum, M. R. (1999). The significance of market capitalization in portfolio management over time. The Journal of Portfolio Management, 25(4), 39-50.
- Roychowdhury, S., & Watts, R. L. (2007). Asymmetric timeliness of earnings, market-to-book, and conservatism in financial reporting. Journal of Accounting and Economics, 44(1-2), 2-31.
- Shin, Y. Z., Chang, J. Y., Jeon, K., & Kim, H. (2020). Female directors on the board and investment efficiency: evidence from Korea. Asian Business & Management, 19(4), 438-479.
- Shroff, N. (2017). Corporate investment and changes in GAAP. Review of Accounting Studies, 22, (1), 1-63.
- Trueman, B. (1986). The relationship between the level of capital expenditures and firm value. The Journal of Financial and Quantitative Analysis, 21(2), 115-129.
- Turner, M. J., & Hesford, J. W. (2019). The impact of renovation capital expenditure on hotel property performance. Cornell Hospitality Quarterly, 60(1), 25-39.
- Vafeas, N., & Shenoy, C. (2005). An empirical investigation of capital expenditure announcements. Applied Economics Letters, 12(14), 907-911.
- Vogt, S. C. (1997). Cash flow and capital spending: Evidence from capital expenditure announcements. Financial Management, 44-57.
- Woolridge, J. R., & Snow, C. C. (1990). Stock market reaction to strategic investment decisions. Strategic Management Journal, 11(5), 353-363.
- Yen, G., & Lee, C. F. (2008). Efficient market hypothesis (EMH): past, present, and future. Review of Pacific Basin Financial Markets and Policies, 11(02), 305-329.
-
Industrial development in Saudi Arabia: disparity in growth and development
Anis Ali
doi: http://dx.doi.org/10.21511/ppm.18(2).2020.03
Problems and Perspectives in Management Volume 18, 2020 Issue #2 pp. 23-35 Views: 3089 Downloads: 1043 TO CITE АНОТАЦІЯIndustrial development in any nation plays a vital role in the strengthening of the economy and employs human resources as per specifications and directly towards the mainstream of the nation. In Saudi Arabia, there was rapid industrialization for four decades. Some manufacturing industries performed well, while some internal and external business environment factors influenced the others’ performance. The study focuses on historical development, as well as recent trends of well-performing and poor-performing industries of Saudi Arabia. Small manufacturing industries in Saudi Arabia are underdeveloped and need more attention to attain sustainable and progressive growth rate in the form of the number of establishments to enjoy the potential. Manufacture of tobacco, computer, electronics and optics, pharmaceuticals and transport equipment are the deprived and underdeveloped industries of the manufacturing sector. There should be some easy credit schemes for the development of deprived or underdeveloped manufacturing industries. To attain sustainable growth and development of the manufacturing sector, a positive attitude of the government towards underdeveloped manufacturing industries, favorable labor laws, and entrepreneurial awareness, technical and financial assistance are necessary. The growth and development of the manufacturing sector of Saudi Arabia will be helpful in the attainment of goals of Vision 2030.
-
Why banks should consider ESG risk factors in bank lending?
Sarwar Uddin Ahmed ,
Samiul Parvez Ahmed ,
Ikramul Hasan
doi: http://dx.doi.org/10.21511/bbs.13(3).2018.07
Banks and Bank Systems Volume 13, 2018 Issue #3 pp. 71-80 Views: 2863 Downloads: 1146 TO CITE АНОТАЦІЯWhy banks should be concerned about incorporating environmental, social and governance (ESG) criteria in the lending process? What is the motivation? This study aims to find the motives for considering environmental, social and governance (ESG) criteria in bank lending process. A primary survey has been conducted to know the current status and motivation for incorporating ESG factors in investment decisions. Sample comprised 30 private commercial banks (PCBs) operating in Bangladesh. Data collected were analyzed with graphs, descriptive statistics, and regression analysis. Findings of the study indicate that banks are mostly considering basic environmental, social and governance factors set by regulators qualitatively. They are lagging behind in considering the advanced ESG criteria needed for sustainable and efficient credit risk management. Based on motivation for incorporating ESG factors, it was found that banks pioneering in incorporating ESG factors in lending decisions are compensated through better financial performance. Findings of the study are expected to encourage practitioners and policy-makers to take more pragmatic steps to incorporate ESG risk factors quantitatively in lending decision-making process.
-
Integrated reporting and financial performance of South African listed banks
Reon Matemane ,
Rozane Wentzel
doi: http://dx.doi.org/10.21511/bbs.14(2).2019.11
Banks and Bank Systems Volume 14, 2019 Issue #2 pp. 128-139 Views: 2800 Downloads: 553 TO CITE АНОТАЦІЯThe recent development of integrated reporting intends to address the limitations associated with corporate reporting practices. This paper aims to examine whether a statistically significant relationship exists between integrated reporting quality and financial performance. Secondary data was used, namely the integrated reports and annual financial statements of South African banks listed on the Johannesburg Stock Exchange (JSE) for 2010–2014. For the period 2005–2009, only the financial statements were used, since integrated reporting was not yet mandatory. The research design was longitudinal and it combined qualitative and quantitative methods. Descriptive statistics and Feasible Generalized Least Square (FGLS) were used to explore the relationships between financial performance and integrated reporting quality. The results indicate that there is a positive relationship between integrated reporting quality (IRQ) and earnings per share (EPS). However, there is no significant relationship between IRQ and Tobin’s q (Q-Ratio), IRQ and return on equity (ROE), IRQ and return on assets (ROA) as well as IRQ and economic value added (EVA). Moreover, there are no significant differences on the financial performance of the listed banks before and after the introduction of integrated reporting.
