Major Investments, Firm Financing Decisions, and Long-Run Performance

43 Pages Posted: 8 Mar 2006

See all articles by Ralf Elsas

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Date Written: February 2006

Abstract

We assemble a sample of 1,558 large investments made by 1,185 firms over the period 1989-1999, and study two main issues: How do firms pay for these large investments? And how does the stock market subsequently evaluate them? We find that major investments are mostly externally financed. The pecking order and market timing effects on capital structure are transitory. Firms move toward target leverage ratios. Long-run abnormal stock returns are not generally consistent with the hypothesis that managers tend to overinvest with internal funds. Only firms financing large projects with (newly-raised) external funds exhibit reliably negative abnormal returns over the subsequent 1 - 3 years.

Keywords: firm financing, firm investments, long-run performance

JEL Classification: G14, G31, G32

Suggested Citation

Elsas, Ralf and Flannery, Mark Jeffrey and Garfinkel, Jon A., Major Investments, Firm Financing Decisions, and Long-Run Performance (February 2006). EFA 2004 MAASTRICHT. Available at SSRN: https://ssrn.com/abstract=519542 or http://dx.doi.org/10.2139/ssrn.519542

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Jon A. Garfinkel

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

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