A review on the relationship of capital investment and future earning

Abstract

Studies in early phase of capital investment are focused towards the investment decision and appraisal due to considerable controversy on, whether Net Present Value or Internal Rate of Return will essentially maximize the shareholder’s wealth. Later, capital investment is referred as crucial managerial decision in generating future benefit that eventually increases the national economy based on traditional capital investment dynamics. However, empirical findings show that not every capital investment announcement has significant positive relationship with future earnings. Literature reviews indicate mixed result of capital investment relationship with firm’s future earning, which varies according to the level of capital investment and financing. Review furthermore explains that capital investments are projected for other reasons despite future earning such as obligatory by government body. Based on the review, this study recognizes the need to understand the unique behavior of capital investment in various sectors in generating future earnings by looking at linearity level, effect capital investment on profitability and stock return.