Value-Relevance Of Capital Expenditures And Business Cycle

The authors examine the relation between corporate capital investments and business cycles. Specifically, they test whether the stock market exhibits different reactions to corporate capital expenditures under different business conditions. It is natural to expect that managers adjust the extent and timing of their long-term capital expenditures to adjust their production capacity to meet the demand for their products in the market place in tandem with different business conditions. Using 33,146 firm-year observations over 20 year period they provide empirical evidence, consistent with the prediction, that US industrial firms' capital expenditures during an expansionary (contractionary or slump) business cycle are more (less) value-relevant, measured by buy-and-hold stock return, to the capital market participants.