The Intra-business Group Effects of Capital Expenditure Announcements on Firm Value

Abstract

This research examines whether the ownership and control structures of business groups affect the shareholder wealth of member firms based on the capital expenditure announcements of one member, using a Taiwanese sample. We combine research on stock market microstructure with more recent studies that adopt the agency perspectives and the resource-based view, and argue that a pyramidal ownership structure and family control increase the risk of expropriation. We find that the focal firms experience significantly positive stock market reactions to capital expenditure announcements, and that the other member firms in the business group experience, on average, negative abnormal returns. The results further indicate that business groups with a pyramidal ownership structure experience significantly more negative stock market reactions, and this also occurs when both member and focal firms are located in related industries. In addition, the findings suggest that the existence of a family-controlled business group is negatively but not significant correlated with the abnormal returns of member firms. These findings are consistent with our understanding of the governance role of ownership structure, based on an agency perspective.