Major Investments, Firm Financing Decisions, and Long-Run Performance
43 Pages Posted: 8 Mar 2006
Date Written: February 2006
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: Suggested Citation