We examine the effect of changes in the components of property, plant and equipment (PPE) on future stock returns using UK data for the 1990-2004 period. Using portfolio and regression tests, we find that the capital investment measures at different levels of aggregation, from changes in PPE to changes in net operating assets, are negatively related to future abnormal share returns, consistent with the US evidence. The PPE components items that drive the UK relation are mainly depreciation and transitory items that include impairment, additions through mergers and acquisitions, and disposals. Our results are consistent with the hypothesized direction of pricing of operating leverage through depreciation and mispricing of cash flow news reflected in transitory items although explanations related to mispricing of accounting measurement error cannot be ruled out. Pure investment measures, notably capital expenditure, add little to the predictability of stock returns.
|Translated title of the contribution||Property, Plant and Equipment and Future Stock Returns: The UK Evidence|
|Publication status||Published - Nov 2011|