Capital expenditures and corporate earnings

Abstract

Abstract Purpose – The purpose of this paper is to examine the relationship between capital expenditures and corporate earnings for 357 manufacturing firms listed on the Taiwan Stock Exchange over the sample period 1992‐2002. Design/methodology/approach – The sample period of 11 years is divided into capital investment period and performance period. The sample firms are first grouped into eight portfolios ranked by capital investment ratio estimated from the investment period. Corporate earnings in the performance period for the eight portfolios are examined to see if any positive association exists. Regressions are then estimated to test the relationship between capital expenditures and corporate earnings. Findings – The results indicate a significantly positive association between capital expenditures and future corporate earnings even after controlling for current corporate earnings. Practical implications – The results indicate that the unexpected announcements of capital expenditures are good news for investors in the investment practice. Originality/value – Previous studies on the relationship between capital expenditures and corporate earnings are based mainly on developed countries. Empirical evidence from the manufacturing firms listed on the Taiwan Stock Exchange would provide further insights regarding this important issue.

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