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The value relevance of capital expenditures and the business cycle

Sungsoo Kim (Rutgers University Camden, Camden, New Jersey, USA)
Brandon byunghwan Lee (Indiana University Northwest, Gary, Indiana, USA)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 16 July 2018

Issue publication date: 16 August 2018




This paper aims to clarify the relationship between corporate capital investments and business cycles. Specifically, a major purpose of this paper is to investigate whether there are inherent differences in corporate investment patterns and whether the stock market exhibits different reactions to the value relevance of capital expenditures across different business conditions.


The authors use pooled ordinary least square regressions with archival stock price data and financial data from CRSP and Compustat. The authors regress buy and hold returns on the main test variables and control variables that are identified to be related to the investment literature.


This paper provides empirical evidence that US firms’ capital expenditures are more value relevant to capital market participants during expansionary business cycles and, conversely, less value relevant during contractionary business cycles. This evidence validates previous literature that has found the information content of capital expenditures to be uncertain and cyclical in nature.

Research limitations/implications

The main limitation of this paper, as with other work dealing with stock returns and archived financial data, is that the authors try to match stock returns with contemporaneous financial data in an association study context. The precise mapping in this methodology is always challenging and has been questioned in the literature.

Practical implications

This paper has various implications for capital market participants. Capital expenditures are good news for investors, but they will make a better investment when firms make capital investments during an expansionary period. Creditors deciding whether to extend credit to firms would benefit from more accurate information on the viability of long-term investment. The results also suggest to creditors that an excessive number of loans during the contractionary period may be suboptimal because firms’ returns on capital investment are smaller in that period than in the expansionary period.

Social implications

Given the valuation of implications of long-term capital investments across different business conditions, this paper sheds light on asset allocations for mutual funds, institutional investors who are entrusted with investors’ investments including retirement funds.


This paper fulfils an identified need to study how capital investments are valued differently across different business conditions.



Kim, S. and Lee, B.b. (2018), "The value relevance of capital expenditures and the business cycle", Studies in Economics and Finance, Vol. 35 No. 3, pp. 386-406.



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