Overinvestment, Underinvestment, Efficient Investment Decrease, and Efficient Investment Increase

Abstract

Using data of Chinese listed companies, we find that the relationship between capital expenditure growth and stock return does not monotonously increase or decrease. Four types of relationships exist between capital expenditure growth and stock returns: overinvestment, underinvestment, efficient investment decrease, and efficient investment increase. The first two types show inefficient investments, whereas the last two types show efficient investments. We further explore how ownership structure in Chinese listed companies affects the relationship between capital expenditure growth and stock return. We find that companies controlled by private investors tend to make inefficient investment decisions because of agency problems.