Access to Equity Markets, Corporate Investments and Stock Returns: International Evidence

Abstract

Recent studies have documented that, in the United States, firms that increase asset investment subsequently earn substantially lower risk-adjusted returns, which is referred to as the investment or asset growth effect. In this study, we document that there exist substantial cross-country differences in the asset growth effect. More specifically, we find a strong asset growth effect among developed countries, but no such an effect among developing countries. Further analysis indicates that, among developed countries, cross-country difference in the asset growth effect can be explained by the ease of access to equity markets in addition to country characteristics such as culture and corporate asset growth. However, the inclusion of these country characteristics does not damper the effect of the ease of access to equity markets on the asset growth effect. Our results appear to be generally consistent with an overinvestment explanation for the investment effect initiated by Titman, Wei, and Xie (2004) and to be inconsistent with the prediction by the q-theory with investment frictions suggested by Li and Zhang (2010).