Investments transformation and stock price behavior: empirical evidence from the Japanese firms

Purpose This study investigates whether investment dynamics are associated with equity behavior. We analyze and evaluate the associations, considering both the risk and return dimensions. Design/methodology/approach This study uses a panel dataset consisting of 172 Japanese firms’ annual data from 2010 to 2023. We implement panel data analysis, either fixed- or random-effects, to examine the association between investment transformation and the equity risk-return parameters. Both systematic and nonsystematic risks are included in the extended risk parameters. We also perform subsample analysis by comparing the years before and after the COVID-19 pandemic and further evaluate the results of the lagged variable up to three years. Findings We find that a firm’s working capital management is associated with better current risk-adjusted returns. We further find that equity mispricing does occur in Japanese firms and equity markets. We elaborate that this mispricing is also related to risk reduction and can explain the Japanese financial market’s more risk-averse preferences. Our findings about mispricing are associated with investment dynamics and strongly related to future one- and two-year-ahead equity behavior. Our further snowball effect reveals that the results are consistent for lagged one-year, contradictory for lagged two-year and somewhat similar for lagged three-year variables. We also observe higher uncertainties in the Japanese firms and financial markets after the pandemic period. Originality/value We extend previous models in the current literature by including equity risk parameters. A subsample analysis is performed to more deeply examine the uniqueness of Japanese firms, especially during the pandemic period. We further analyze the associations between investment dynamics and equity behavior for longer lag periods.