Purpose – Market capitalization of firms reflects the current value of a firm and provides a reasonable basis
on mergers and acquisition bargains. Determinants of a firm’s increasing or decreasing market capitalization
are multi-faceted, hence the study. The paper is about a historical study of the responsiveness of common
share prices of some listed industrial companies to the firms’ investments in capital expenditure. This study
aims to discuss the impact of capital expenditure on a firm’s market capitalization, with a focus on companies
listed on the Malawi stock exchange (MSE).
Design/methodology/approach – The study reviews data collected from published annual reports for
the years from 2007 to 2015. The variations in capital expenditure (CAPEX) which are termed “increase” or
“decrease” were studied to establish their association with variations in stock prices before the increase or
decrease, and after the increase or decrease. As stock price changes are caused by other determinants, the
variables of return on capital employed (ROCE), net profit margin (NPM), asset turnover (ATO) and earnings
retention ratio (ERT) were analyzed, and a respective correlation test was done against CAPEX movement
over the years through panel data analysis and regression analysis to establish the correlation between the
variables using XLSTAT.
Findings – At 95 per cent confidence level, CAPEX correlates with ROCE and NPM at 0.373 and 0.249
coefficients, respectively, and negatively with ERT at 6.45e-2. With tests favoring a positive relationship
between elements of profitability and stock price, the study finds that there is a positive relationship between
a firm’s CAPEXs and its future stock prices.
Research limitations/implications – The firm’s commitment to CAPEX has a positive impact on its
stock price on the stock exchange. These findings, however, need to be interpreted with caution as the data
reviewed excluded that from financial institutions, the inclusion of which may affect the outcome, and that the
data are derived from a small and young stock market which may be lacking in its efficiency compared to the
old and big ones the world over.
Originality/value – The study was undertaken based on the study of listed companies on the Malawi
Stock Exchange, and the results may or may not reflect the reality on the ground in other stock exchanges