Negative Investment Returns in a Developing Market Context

Abstract

Financial theory posits a positive relationship between the value of investment that firms undertake and subsequent shareholder returns. Surprisingly, recent studies on United States data have found a negative relationship between investment and subsequent shareholder return. This anomaly contravenes the basic theory of investment, as well as traditional capital asset-pricing models, and several conflicting risk-related and behavioural explanations have been suggested by other researchers. South Africa’s developing market is characterised by relatively high arbitrage costs, and high risk conditions, and offers a suitable context to re-examine this anomaly. This study confirms a negative relationship between the value of investment that firms undertake and subsequent shareholder returns in a developing market context. Over the period from December 2004 to December 2016, shares on the Johannesburg Stock Exchange with lower investment rates consistently outperform shares with higher investment rates. The explanation for this anomaly requires further study.