Market response and future performance of inefficient investment: Over-investment or under-investment


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There have been many studies on the market response to investment spending, but only a few have examined the market response to the issue of over-investment or under-investment. This study examines the effect of the issue on market response and future financial performance. The sample includes large-cap companies listed on the Indonesia Stock Exchange (IDX) for 2016–2021. Samples must have at least 120 active trading days for each year. Two hundred and thirty-two observations meet the qualifications. This study adopts the investment inefficiency model developed by previous studies to measure over-investment or under-investment. Residual inefficient investment models are used as over-investment or under-investment scores, in addition to the dummy of the residual category. Market response is measured by cumulative abnormal returns (CAR), market capitalization (MCAP), and market-to-book value (MTB).
Meanwhile, a firm’s performance uses return on assets (ROA) and return on equity (ROE). The results show that the coefficient of the inefficient investment variable, using both the residual value and the dummy variable, shows a negative direction, which means the market responds negatively to over-investment or under-investment. However, the value of t is significant at the <0.01 level on the market response variable as measured by MTB, but not significant for the other two proxies. Thus, hypothesis 1 is supported, although not for all market response proxies. The value of the inefficient investment coefficient also shows a negative direction when testing hypothesis 2 and is significant at the <0.1 level. These results are consistent with future performance variables measured by ROA and ROE.

The study was supported by PDUPT (Higher Education Primary Research Grant) from the Ministry of Education, Culture, Research and Technology, Government of Indonesia.

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    • Table 1. Variable definition
    • Table 2. Mean-difference between over-invest and under-invest
    • Table 3. Descriptive statistics (CAR, MCAP, MTB, CAPEX, INVEFF) by sector
    • Table 4. Descriptive statistics (FSIZE, ASSGRT, DER, FCF, ROA) by sector
    • Table 5. Descriptive statistics (ROE, PUBOWN, SALESIC) by sector
    • Table 6. Market response to inefficient investment
    • Table 7. Future financial performance of investment inefficiency
    • Conceptualization
      Juniarti Juniarti
    • Formal Analysis
      Juniarti Juniarti
    • Funding acquisition
      Juniarti Juniarti
    • Methodology
      Juniarti Juniarti
    • Supervision
      Juniarti Juniarti
    • Validation
      Juniarti Juniarti
    • Writing – original draft
      Juniarti Juniarti
    • Writing – review & editing
      Juniarti Juniarti
    • Data curation
      Yulius Jogi Christiawan, Hendri Kwistianus
    • Investigation
      Yulius Jogi Christiawan, Hendri Kwistianus
    • Project administration
      Yulius Jogi Christiawan, Hendri Kwistianus
    • Resources
      Yulius Jogi Christiawan
    • Software
      Hendri Kwistianus