Investment Opportunities and Market Reaction To Capital Expenditure Decisions
Posted: 15 Dec 2009
Date Written: 1998
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: Suggested Citation