Investment Opportunities and Market Reaction To Capital Expenditure Decisions

Posted: 15 Dec 2009

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Peter Wright

University of Memphis - Fogelman College of Business and Economics

Charlie Charoenwong

Nanyang Technological University (NTU)

Date Written: 1998

Abstract

In this study, we argue that share price reaction to a ®rm's capital expenditure decisions depends critically on the market's assessment of the quality of its investment opportunities. We postulate that announcements of increases (decreases) in capital expenditures positively (negatively) affect the stock prices of firms with valuable investment opportunities. Contrarily, we predict that announcements of increases (decreases) in capital spending negatively (positively) affect the share prices of firms without such opportunities. Our empirical results are generally consistent with these predictions. Overall, empirical evidence supports our conjecture that it is the quality of the firm's investment opportunities rather than its industry affliation which determines the share price reaction to its capital expenditure decisions.

Keywords: Investment opportunities, Tobin's q, Event study, Capital expenditure

JEL Classification: G14

Suggested Citation

Chung, Kee H. and Wright, Peter and Charoenwong, Charlie, Investment Opportunities and Market Reaction To Capital Expenditure Decisions (1998). Journal of Banking and Finance, Vol. 22, 1998, Available at SSRN: https://ssrn.com/abstract=1522093

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Peter Wright

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Charlie Charoenwong

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

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