ANNUAL STOCK RETURNS VS. CAPITAL EXPENDITURE AND EARNINGS: INTERNATIONAL EVIDENCE

The causality relationships and cumulative impacts of the lags of earnings and the lags of capital expenditure on subsequent annual stock returns is examined using 40 different countries. The results suggest that there is a granger causality relationship from earnings to returns. Furthermore, though weaker, there is also such a relationship from capital expenditure to stock returns. Markets seem to be more efficient in G7 than non-G7 and in common law G7 than civil law G7 countries. Corporate governance and other control mechanisms seem to persuade managers to make better investment decisions