A Cross-Sectional Analysis of the Stock Market's Reaction to Corporate Investment Decisions

China Accounting and Finance Review, Vol. 2 No. 4, 2000

University of Alberta School of Business Research Paper No. 2013-918

Posted: 4 Oct 2013

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis

gary smith

Independent

Wayne Yu

City University of Hong Kong

Date Written: June 17, 2000

Abstract

This paper investigates the systematic variation of stock price reactions to corporate capital budget announcements. We first use an event study methodology to measure the market’s reaction to capital investment announcements. These reactions are then regressed upon measures of agency problems and measures of intangible assets. We find that, on average, the market’s reaction to both capital budget increases and decreases is statistically insignificant. We also find that there is support for the idea that agency problems affect the market’s valuation of investment decisions. Furthermore, there is support for the hypothesis of managerial entrenchment. We also find support for the notion that investment decisions made by managers with strong reputations are more highly valued than those made by other managers. We find no support for the notions that the stock market is myopic or that managers behave myopically. There is also no support for the idea that firms with high levels of cash flow invest inefficiently.

Keywords: Capital investments, capital budgeting, agency problems, management entrenchment, free-cash-flows

Suggested Citation

Morck, Randall K. and Huson, Mark R. and smith, gary and Yu, Wayne, A Cross-Sectional Analysis of the Stock Market's Reaction to Corporate Investment Decisions (June 17, 2000). China Accounting and Finance Review, Vol. 2 No. 4, 2000; University of Alberta School of Business Research Paper No. 2013-918. Available at SSRN: https://ssrn.com/abstract=2280605

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis ( email )

4-20C Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2803 (Phone)
780-492-3325 (Fax)

Gary Smith

Independent ( email )

Wayne Yu

City University of Hong Kong ( email )

Kowloon
Hong Kong

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