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Capital Investment, Earnings, and Annual Stock Returns: Causality Relationships In China

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  • Ahmet Inci

Abstract

The Granger-causality effects between earnings, cash flow, and capital investment as well as on subsequent annual stock returns are examined for China in an international framework. Overall, there is a Granger causality relationship from earnings to capital investment. Furthermore, there is strong causality in the reverse direction as well. Capital investment causes positive subsequent stock returns while earnings have a more direct and contemporaneous impact on stock prices. Regulatory mechanisms, managerial monitoring, state capitalism controls work best during expansions and non-crisis periods. The causality relationships diminish during recessions and crisis periods, such as the Asian Crisis. The results observed in China are different from the results for G7 countries, or the results for other non-G7 countries. Using cash flows instead of earnings confirms the conclusions. Insider ownership is not necessarily as effective as other control mechanisms in China. Copyright Eurasia Business and Economics Society 2011

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  • Ahmet Inci, 2011. "Capital Investment, Earnings, and Annual Stock Returns: Causality Relationships In China," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 95-125, December.
    • Handle: RePEc:spr:eurase:v:1:y:2011:i:2:p:95-125
    DOI: 10.14208/BF03353826
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    Cited by:

    1. Kose John & Joe Shangguan & Ravi Mateti, 2015. "Financing activities after accounting restatements: an examination of SEOs and PIPEs," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(1), pages 139-160, June.
    2. Chi Keung Marco Lau & Mehmet Huseyin Bilgin, 2013. "Hedging with Chinese Aluminum Futures: International Evidence with Return and Volatility Spillover Indices Under Structural Breaks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S1), pages 37-48, January.
    3. Roi D. Taussig, 2017. "Stickiness of employee expenses and implications for stock returns," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 297-309, August.

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    More about this item

    Keywords

    China; Earnings; Capital Investment; Annual Stock Returns; G30; G31; G34;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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