Notes that although previous research has found capital expenditure to be value relevant, there has been no direct evidence that it has a positive linear association with future earnings. Uses 1976‐1989 data from a sample of US manufacturing firms to examine this link and finds that firms do not systematically invest in earnings increasing projects. Shows that firms without future losses (“winners”) had a positive association between capital expenditure and future earnings but those with losses (“losers”) had a negative one; and that if losses are excluded, capital expenditure generally gives positive information about future earnings. Considers consistency with other research, the limitations of the study and avenues for further research.
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