Abstract
This paper applies free cash flow and information asymmetry hypotheses to investigate whether managers pursuit their private benefits by using capital investment expenditure (hereafter CI) increases or not, and to explore whether managers decrease CI as more dividend payments under information asymmetry hypothesis. Consequently, the present study investigates the effect of CI increases on abnormal stock returns of Taiwanese listed firms. The empirical results show that during full period and the post financial tsunami period, the effects of an increase in CI on stocks returns are positive, and the CI-spread is negative. This supports the hypothesis of information asymmetry. However, in the electronics industry during the entire study period and the post financial tsunami period, the expenditure of low CI tends to support free cash flow hypothesis but that of high CI supports the hypothesis of information asymmetry.
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