The persistence of current market valuation of future capital investment

• Published date: 01 July 2020
• Date: 01 July 2020
• Author: Nancy Beneda
• DOI: http://doi.org/10.1002/jcaf.22445

BLIND PEER REVIEW

The persistence of current market valuation of future

capital investment

Nancy Beneda

Nistler College of Business and Public

Administration, University of North

Dakota, Grand Forks, North Dakota

Correspondence

Nancy Beneda, Nistler College of Business

and Public Administration, University of

North Dakota, Centennial Dr., Grand

Forks, ND 58203, United States.

Email: nancy.beneda@und.edu

Abstract

This paper examines the valuation of future potential capital spending and

research and development expense (capital investment) in current market

value of equity. The purpose of this study is to develop an option modelling

technique which can be used by financial analysts to assist in measuring the

current market value of future new capital spending and the persistence of the

value of capital investment. A capital investment Delta is developed, using

option pricing modelling, as an indicator of productive future capital invest-

ment. This study uses a sample of initial public offerings (IPOs), which went

public during the years, 2004 through 2015. The metrics are computed at the

end of the second year after going public and then regressed on the next year

NASDAQ adjusted stock return. The results of the study indicate that produc-

tive future capital investment, as developed in the current study, is persistent

and is significantly associated with a firm's future stock performance.

Finance theory suggests that a firm's value is the sum of

(a) the net present values (NPVs) for the existing assets in

place and (b) the NPVs of future feasible projects, which

have not been started. Many studies examine current cap-

ital investment (including research and development) as

an indicator of future growth and/or future financial per-

formance, and find that the productivity of capital invest-

ment is largely determined by how innovative the firm is

(Amburgey, Dacin, & Singh, 1996; Ang & Boyer, 2009;

Arend, Patel, & Park, 2013; Baum & Silverman, 2004;

Espenlaub, Khurshed, & Mohamed, 2012; Garci-

Manj'on & Romero-Merino, 2012; Jain & Kini, 2008;

Lee & Choi, 2015; Lisboa, Skarmeas, & Lages, 2011;

Wang, Dou, Zhu, & Zhou, 2015). These studies have

largely found that certain firm characteristics such as

innovative capability or a specific type of ownership have

better operating performance relative to the firms with-

out that characteristic.

Amburgey et al. (1996) and Baum and Silverman

(2004) suggest that excellent human capital is associated

with firm success. Jain and Kini (2008), Ang and Boyer

(2009), Garci-Manj'on and Romero-Merino (2012), and

Lee and Choi (2015) find that the impact of capital expen-

ditures on operating performance is largely affected by

industry. Jain and Kini (2008) also find that capital

expenditures of firms with new and diversified products

is associated with a longer life expectancy. Lisboa et al.

(2011) distinguish between exploitative and explorative

behavior, finding that explorative behavior has a positive

impact on future operating performance. Espenlaub et al.

(2012) find that firms with product differentiation are

more sustainable. Arend et al. (2013) find that firms

which focus on developing untapped human resources

are associated with higher operating performance. Wang

et al. (2015) find that the presence of external collabora-

tion has a positive impact and financial performance.

Other studies have examined the impact of merger

and acquisition activity (Bonaventura, Bonini, Capizzi, &

Giudici, 2018; Bonaventura & Giudici, 2016; Jain &

Shao, 2014), family involvement (Jain & Shao, 2014),

and corporate governance (Liu & Li, 2014). Li (2011),

Brown, Fazzari, and Petersen (2009), and Nanda and

Rhodes-Kropf (2013) also find that financial constraints,

availability of capital funding, and market conditions

Received: 7 November 2019 Revised: 23 January 2020 Accepted: 27 January 2020

DOI: 10.1002/jcaf.22445

J Corp Acct Fin. 2020;31:163–169. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals, Inc. 163