Investment opportunities and market reaction to capital expenditure decisions

Abstract

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) a ect the stock prices of ®rms with valuable investment opportunities. Contrarily, we predict that announcements of increases (decreases) in capital spending negatively (positively) a ect the share prices of ®rms 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 ®rm's investment opportunities rather than its industry a liation which determines the share price reaction to its capital expenditure decisions. Ó 1998 Elsevier Science B.V. All rights reserved. JEL classi®cation: G14

The Impact of Strategic Investment Choices on Post‐Issue Operating Performance and Survival of US IPO Firms

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