IMPACT OF CAPITAL EXPENDITURE ON STOCK RETURNS OF QUOTED DEPOSIT MONEY BANKS IN NIGERIA
ABSTRACT
The study empirically investigates the impact of capital expenditure on stock returns of quoted deposit money banks in Nigeria for a period of 17 years (1998 to 2014), and the implications of such findings. In order to obtain the dynamic properties of the analysis, time series estimation techniques were applied in the study. Essentially, the correlation coefficient and the ordinary least squared (OLS) econometric method were employed. The results from the empirical analysis show that bank capital structure does not have any significant impact on bank stock returns in Nigeria; firm size has a significant positive impact on bank stock returns; profit after tax is highly significant in the determination of bank stock returns; and the lag value of stock returns does not have any significant impact on current stock returns in Nigeria.
The study recommends among others that policy makers in Nigeria should evolve an enduring banking policies that will ensure are carried out in such a way as to enhance its market value, improve the lots of depositors and the general economic activities in the country.
    TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study            
1.2    Statement of the Research Problem    
1.3    Objective of the Study                
1.4    Hypotheses of the Study            
1.5    Significance of the Study        
1.6    Scope of the Study                
1.7    Limitations of the Study                
1.8    Methodology of the Study            
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                    
2.2    Concept of Stock Market Returns                
2.3    Determinants of Firm’s Capital Expenditures        
2.3.1    Capital Expenditures                    
2.3.2    Determinants of Capital Expenditures            
2.3.3    Total Assets and Stock Returns            
2.3.4    External financing source                
2.3.5    Expectations:                        
2.3.6    Internally Generated Sources of Funds        
2.3.7    Technology                        
2.3.8    Capital Prices                    
2.3.9    Tax Policy                            
2.4    Relationship between Stock Returns and Capital Expenditure                        
2.5    Empirical Literature                        
2.6    Theoretical Framework                        
CHAPTER THREE: METHODOLOGY
3.1    Introduction                        
3.2    Population and Sample Size                
3.3    Model Specification                    
3.4    Estimation Technique                    
3.5    Sources of Data                        
3.6    Operationalization of Variables            
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                    
4.2     Correlation Analysis                    
4.3    Regression Analysis                
CHAPTER FIVE:  SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1    Summary of Findings                
5.2    Conclusion                        
5.3    Policy Recommendations            
Bibliography                        
Appendices                        
CHAPTER ONE
INTRODUCTION
1.9    BACKGROUND OF THE STUDY
    Capital expenditure are long term investment projects embark on by firms and which involves the commitment of huge sums of funds.  The level and nature of the capital expenditure incurred by firms must be such that will have direct positive impact on their profitability and stock prices at the long run. The issue of capital expenditure has been argued by many financial experts as a useful tool in predicting future profitability and stock returns of firms across the globe (Lev & Thiagrajan, 1993). It is also of central importance in corporate finance studies whether firms make sub-optimal investments, and whether market participants fully understand the implications of managers’ incentives to deviate from optimal investment levels when they have the privilege to do so.
    Return on the other hand, is a profit on an investment. It comprises any change in value, and interest or dividends or other such cash flows which the investor receives from the investment. It is usually expressed as a proportion of the amount invested. There several studies that examine corporate capital expenditures and stock market returns. For instance, Fazzari, Hubbard, and Peterson (1988),  Morck, Shleifer and Vishny (1990) submitted that, although firms tend to invest more following increases in their stock returns/prices, cash flows tend to be the best predictor of a firm's capital expenditures. It is also the case that stock returns tend to respond favorably to announcements of major capital expenditure. Capital expenditures should be viewed favourably such that while higher capital expenditures are likely to be associated with greater investment opportunities; higher capital expenditures may also indicate that the capital markets, which provide financing for the investments, have greater confidence in the firm and its management.
    There is a significant negative association between firm capital expenditure and future stock returns and the association is mostly driven by the positive discretionary investment/expenditure sample. A capital expenditure strategy which goes long in the lowest decile of investment and short in the highest decile of investment appears to generate persistent hedge returns. The abnormal return remains significant after controlling firm characteristics and risk factors commonly known to be associated with stock returns.
    According to Donglin (2004), the argument that capital expenditure is more sensitive to cash flow is subject to different interpretations: whether capital rationing with respect to under investment or over investment (Fazzari et al 1988; Kaplan and Zingales, 1997; Jensen, 1986). Without examining the implication of such investment/capital expenditure for future profitability, it is difficult to distinguish the two contradicting theories. The event studies carried out by McConnell and Muscarella (1985) indicates that announcements of increase in planned capital investments/expenditure are generally associated with significantly positive excess stock returns. On the other hand, the study of Blose and Shieh (1997), Vogot (1997) find that market reacts to the level of capital expenditure announcement. Another set of studies along this line was carried out by Kaplan and Zingales (1997) also examines the valuation effects of actual capital expenditure and investment using annual returns submitted a mixed results. Even studies may be subject to two major problems such as firms may be self-selecting to announce investment plans and, that the market may misprice the investment in a short window, which is a valid concern. However, in the longer window studies, market cannot fully understand the implication of capital expenditure on future earnings. Lev and Thiagarajan (1993) find out that industry adjusted capital expenditure growth is positively associated with contemporary returns,
    At the industry level, examination of the individual industry capital expenditure/ investment plans also show that current profits are correlated with revision to investment. Aggregate profits not industry specific profits, are the dominant force. This facts suggest that the industry level, profits are important not because of financial constraints faced by different industries or the signaling power of industry profits, but rather because aggregate profit are correlated with aggregate movement in the desirability of investing in physical capital or capital expenditure (Owen, 1999).
    Profitability is the company's ability to generate profits hence, Myers and Majluf (1984) argue that companies with high profit would have sufficient internal funds to finance their operations so they do not require much external funding. While Johnson and Lee (1994) stated that if a company is more dependent on internal funds than external funds to finance its investment activities, the company will depend on its ability to generate profit. This is consistent with the study of Fazzari, et al (1988) that stated that one of the characteristics of financially constrained firms is the limitations in obtaining external funding. So if there is a high level of corporate profitability, it will increase the availability of internal funds, which can be used to fund its investment activities. It is expected that if quoted banks in the Nigerian context effectively and efficiently manage direct their capital expenditure to productive and profit yielding ventures or investment, it will inadvertently affect in a more positive manner their overall stock prices/returns in the Nigerian stock market.
1.10    STATEMENT OF THE RESEARCH PROBLEM
    In view of the huge amount of capital expenditure by Corporate Organizations, particularly banks quoted on the Nigerian stock market, the total capital expenditure is enormous and it is surprising that so few studies have addressed the implications of capital expenditure for future profitability and stock returns of quoted banks in Nigeria. The study of Fairfield, Whisenant and Yohn (2003a) on the impact of capital expenditure on stock returns, indicate a negative relationship between growth in net long term operating assets and one year ahead future return on assets. Richardson, Sloan, Soliman and Tuna (2003) also find a similar relationship and attribute it to the lower reliability of long term asset accruals. It is reasonable, though, to believe that growth in long term asset accruals also capture investment intensity. Study of Abarbanell and BusheeaL (1997), Diamond (1991), Mills, et al. (1995), Owen (1999), Kristianti (2003), Bhagat, et al (2005), Titman, Wei and Xie (2003a) and Donglin (2004) all also show that capital expenditure conveys a negative signal for future earnings. Thus, there seems to be a negative relation between capital expenditure/investment and future profitability. However, there is little evidence as to what factors could explain this negative association (Owen, 1999).
    On the other hand, some other studies like Chirinko (1993), Barro (1990), Blanchard, Rhee and Summers (1993), Morck, Shleifer and Vishny (1990) and Cochrane (1991) examine the relationship between investment, stock returns and corporate profits. They all find lagged stock returns and contemporaneous profits explain investment, using annual aggregate data for the US. In other word, they all posited a strong positive relationship between capital expenditure and stock returns.
    In view of these conflicting findings above, it is therefore necessary to empirically test the relationship between capital expenditure and stock returns of quoted banks in the Nigerian context and to see the extent to which firms’ capital expenditure impact its profitability and returns over time.
    Thus, the study seeks to provide answers to the following research questions:
i)    What are the determinants of capital expenditure in Nigerian banks?
ii)    To what extent does the determinant of capital expenditure affect stock returns in Nigerian banks?
iii)    To what extent does total asset influence stock returns in Nigerian banks?
1.11    OBJECTIVE OF THE STUDY
      The specific objectives to guide this study include to:
i)    Determine the determinants of capital expenditure in Nigerian bank.
ii)    Examine the effects of the determinants of capital expenditure on stock returns in Nigerian banks
iii)    Determine the effects of total assets on stock returns in Nigerian banks.
1.12    HYPOTHESES OF THE STUDY
     The following hypotheses will be tested in the course of the study:
i)    There is no significant effect of capital expenditure on stock returns in Nigeria.
ii)    There is no significant effect of total assets on stock returns in Nigeria.
1.13    SIGNIFICANCE OF THE STUDY
    The study presents the relationship between capital expenditure of banks and their stock returns. This is necessitated because of its importance. We observed that banks’ ability to make profit and have high market value or price is purely a function of its investment profile and ability and as well as the quantum of capital expenditure in this direction.  
    Thus, the results from this study would be of great importance to bank’s shareholders and the entire public. The outcome of this study would provide the basic relevant information about the implications of the implementation of their various capital expenditure on the overall profitability of their banks and which will also help to guide direct their investment policy.
    The study will also provide useful information for policy makers in the country on the appropriate policy that would be best suited for the overall performance of banking industry leading to the overall growth and development of the Nigerian economy at large.
    Again, this study will be relevant to students of finance, economics, management sciences and allied disciplines who may like to carry out further study in this direction as the outcome of this study form yet a foundation for further studies.
    Finally, the study will also provide useful information to the academia and researchers to carry out further studies either in the same area.    
1.14    SCOPE OF THE STUDY
    The study necessitated a cross sectional data covering a period of 17years (1998 to 2014). Relevant data shall be sourced from the banks’ financial statement and the Central Bank of Nigeria Statistical Bulletin (various years). The population entails all the quoted banks in Nigeria
1.15    LIMITATIONS OF THE STUDY
Two major limitations are envisaged in the course of this study. These are:
i)    The data collected from the various sources may not be accurate in terms of figures and measurement. Often time, in the Nigeria context, data from different sources do not give the same figure and researchers are often left with the doubt of how these data were collected, measured and published for public use in the first place.    
ii)    In terms of the method of data analysis to be employed in analyzing the hypothesized variables; the method may not be sophisticated enough or be all embracing due to some methodological weaknesses. In all, efforts will be made to ensure that errors are minimized such that the results so obtained will be very accurate and reliable for policy implementation.   
1.16    METHODOLOGY OF THE STUDY
    The Ordinary Least Squares (OLS) estimation technique is employed in the empirical analysis. The reason being that it is the best linear unbiased estimator. It is based on the minimization of the sum of squares residuals of the model. This is why the OLS method of estimation will be used in this study.

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