Firms experience excess returns with higher current capital expenditures compared to historical past

Capital Expenditures: Value-Relevance and Fourth-Quarter Effects by Callen, Livnat & Ryan

Abstract:
This study empirically documents that firms with large ratios of current capital expenditures to prior four-

year average capital expenditures enjoy positive contemporaneous abnormal returns. It further documents that average capital expenditures across Compustat-covered U.S. corporations are significantly greater (smaller) in the fourth (first) quarter of the fiscal year than in other quarters. This capital expenditure timing effect holds consistently across years, industries, fiscal year ends, and a variety of firm attributes. The study tests a number of potential economic and accounting explanations for the capital expenditure timing effect, including “use it or lose it”, uncertainty resolution, taxes and income smoothing. It reports evidence consistent with “use it or lose it” and to a lesser degree with taxes and income smoothing. It finds weak or no evidence for uncertainty resolution and other explanations. The study concludes with a discussion of the implications of these findings for financial statement analysis.


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