Abstract

Capital investment, which is closely related to a firms’ production, sales, and financial activities, is important because it affects long－term profitability for the enterprise. Previous research has analyzed the causes of capital investment efficiency and the factors that can improve capital efficiency. On the other hand, in this study, the effect of over－investment or under－investment on future earnings risk(variability) and future earnings is analyzed. For the sample of KOSPI listed companies from 1994 to 2015, capital investment is divided into efficient capital investment, over investment, and under investment. In addition, since the effect of capital investment on future earnings variability differs depending on the business environment, it is divided into manufacturing firms and non－manufacturing firms. The results of the analysis are as follows. First, over and under capital investment has a negative impact on future earnings variability rather than efficient capital investment. Secondly, it can be seen that under capital investment has a more negative impact on future earnings variability than over capital investment. Third, over and under capital investment in non－manufacturing companies has a greater negative impact on future earnings variability than manufacturing firms. Fourthly, in the result of the additional analysis that the dependent variable is analyzed as future earnings, it is found that the efficient investment has a positive relationship with the future earnings, while the inefficient investment(over and under investment) has a negative relationship with the future earnings. It was also found that under investment had more negative impact than over investment. This research has several contributions. First, understanding future earnings variability from over and under investment can help firms make capital investment decisions. Secondly, it provides implications for accounting decisions such as depreciation and asset impairment in accounting practice. Thirdly, there is also a contribution that can explain the inter－linkage in capital investment anomaly research.

Keywords

• efficient investment
• over－investment
• under－investment
• future earnings variability

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