Document Type

Article

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Published by The Clute Institute in the International Business & Economics Research Journal, volume 6 issue 11, p. 67-80, 2007.

Abstract

The impact of financial development of a country on the earnings, capital spending, and stock returns of the firms of that country is the subject of this study. There are two different financial development indices which are utilized. The first is based on Love (2003), and the second is based on Khurana (2006). Using 40 different countries, the causality relationships and cumulative impacts of the lags of earnings and lags of capital spending on subsequent earnings, capital spending, and returns are examined for the financially developed countries and financially non-developed countries. Earnings and capital spending Granger-cause stock returns in financially developed countries. There is also evidence of efficiency in financially developed countries.

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