Capital Investment Efficiency and Stock Performance: Evidence from Commercial Banks of Nepal

By Koirala, Santosh; Sapkota, Shiba | ASBM Journal of Management, January 2015 | Go to article overview

Capital Investment Efficiency and Stock Performance: Evidence from Commercial Banks of Nepal


Koirala, Santosh, Sapkota, Shiba, ASBM Journal of Management


Introduction

Informed stock price conveys meaningful signals to the management about the quality of their decisions. It implies that the corporate capital investment should be more efficient where the stock prices are more informative. It also conveys meaningful signals to the financial market about the need to intervene when management decisions are poor. Corporate governance mechanisms, such as shareholder lawsuits, executive options, institutional investor pressures, and the market for corporate control, depend on stock prices. Where stock prices are more informative, these mechanisms induce better corporate governance, which includes more efficient capital investment decision.

Tobins's marginal q ratio measures the efficiency of corporate investment, the change in firm value due to unexpected change in investment scaled by the expected change in investment. The deviation in Tobin's marginal q from its optimal level is a measure of investment efficiency the smaller the deviation, the grater the investment efficiency (Dumev, 2004).

This study has used balanced panel datasets, which increases the sample size considerably, allowing for higher degrees of freedom and more accurate and reliable statistical tests; they reduce co linearity between regressors. Another advantage of using panel co-integration is that it allows for heterogeneity between firms. Furthermore, the number of observations available when testing the stationarity of the residual series in a level regression is greatly increased in a panel framework and this can substantially increase the power of the co-integration tests (Rapach and Wohar, 2004).

Statement of the Problem

Significant efforts have been made to understand the transmission of investment efficiency on Stock performances. For instance, Dumev, Morck and Yeung (2006) have shown with theoretical and empirical evidence the positive relationship between capital investment efficiency and stock performance. Firm specific variation is largely unassociated with public announcements. Roll (1988) argued that firm specific return variation is, therefore, mainly due to trading by investors with private information. Grossman and Stiglitz (1980) posited that there is strongly signaling effect in efficient capital market. Few studies have been carried out in countries like Nepal, with amateur capital markets, regarding information signaling in capital market. Specifically, no study is available that explores, in particular, relationship between capital investment efficiency and stock performances. It is due to this that there is imperative to see whether capital budgeting efficiency signals better stock performance. This study has attempted to fill this gap and has examined influences of firm specific decisions and macro-economic variables as controlled variables to explain stock returns with focus on Nepalese commercial banks.

Objectives of the Study

The main objective of this study is to examine empirically whether efficiency in capital investment decisions affects stock return. It makes an attempt to test the relationship between variation on stock return and capital budgeting effectiveness controlling macro-economic variables and firm specific variables.

Organization of the Study

The study has been divided into five sections; the problem statement, objectives of the study, scope, and limitation of the study have been explored in Section I. Section 2 discloses the literature review regarding conceptual framework and reviews related study. Section 3 takes care of research design, sample of the study, sampling techniques, quantitative data analysis. Section 4 has dealt with the data analysis and Section 5 has explored conclusions and looks at the way forward.

Conceptual Framework and Literature Review

Conceptual Framework

Chang, Hamao and Lakonishok (1991) have studied the fundamentals of stock return in Japan forthe period of 17years(from 1971 to 1988) and established the same relations. …

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