A Cross-Sectional Analysis of the Stock Market's Reaction to Corporate Investment Decisions
China Accounting and Finance Review, Vol. 2 No. 4, 2000
Posted: 4 Oct 2013
Date Written: June 17, 2000
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
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