Capital Expenditure Announcements Research Articles

Disclosure policy choice, stock returns and information asymmetry: Evidence from capital expenditure announcements

This article investigates whether firms commit ex-ante to higher levels of investment transparency and the impact of transparency on stock returns and information asymmetry. We construct a novel measure of investment transparency based upon the extensiveness of profitability forecasts and cost disclosures in new project-level capital investment announcements. Using cross-sectional regression, we find that prior to announcement greater investment transparency is associated with lower information asymmetry. We further show that rather than reporting information strategically on a project-by-project basis, managers commit ex-ante to a disclosure policy that influences the disclosure level of new project announcements, and that a firm-level commitment to fuller disclosure reduces information asymmetry in the days surrounding the announcement. Using event study methodology, we also find that investors react more positively to announcements displaying greater investment transparency. JEL Classification: G14, D83, G31, G30, G38

기업 자본적지출 공시 주위에서의 기관투자자 거래행태

기업 자본적지출 공시 주위에서의 기관투자자 거래행태

Spillover Effects of Capital Expenditure Announcements Within Business Groups

AbstractUsing the capital expenditure announcements of Taiwanese business group affiliated firms, this study examines whether the group diversification and ownership structure influence intragroup spillover effects. We find that the stock price reactions of the announcing firms are positively associated with both the stock price reactions and the post‐announcement long‐term performance of their non‐announcing group peers. More importantly, the evidence shows that this positive spillover effect weakens for business groups associated with a pyramidal ownership structure. The evidence supports the conjecture that principal–principal conflicts play an important role in moderating the spillover effects in a business group. The findings further show that the spillover effects are stronger during periods of financial crises. Finally, in the 3‐year period following announcements, the non‐announcing group members experience declining industry‐adjusted performance.

How is Investment Efficiency Related to Investment Transparency?

The relationship between investment efficiency and investment transparency is investigated using a sample of Australian listed company capital expenditure announcements between 2008 and 2014. We suggest two opposing hypotheses to explain why investment efficiency may influence the informativeness of investment disclosures, and present evidence that investment transparency is greater for firms that are over-investing and when sales growth is positive. This evidence is supported by the results from a simultaneous equation regression that considers endogeneity issues. Further evidence reveals that these firms achieve higher profitability and cash flow from operations surrounding the investment announcements, and that high sales growth firms maintain higher debt levels to sustain their investment. Hence the availability of liquid resources appears to support the aggressive investment practices of these firms, and their need for debt financing gives their managers incentives to disclose more financial information in order to ‘hype’ the stock and reduce the costs of financing. Considering possible reverse causality, the results show that investment transparency does not improve investment efficiency. Our interpretation is that managers’ forecasts of project profitability are unsubstantiated and hence in an over-investment situation are ineffective in reducing information asymmetries.

The Effect of Investment Opportunities and Free Cash Flow on Capital Expenditure Announcements

The Effect of Investment Opportunities and Free Cash Flow on Capital Expenditure Announcements

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

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.

The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Competitive Advantage?

AbstractThis study tests the proposal that by undertaking voluntary capital expenditures that are subject to lengthy environmental regulatory delays, listed companies can gain a competitive advantage. The stock market is found to react positively to new capital expenditure announcements when projects are expected to experience long delays in obtaining environmental regulatory approval. Two sources of potential competitive advantage are firm learning and first mover advantages. Lengthy delays in regulatory processes and high compliance costs incurred for environmentally‐sensitive projects may allow firms opportunities to develop specialised capabilities and/or to deter industry competitors and new entrants, resulting in greater expected project NPVs. The findings also underscore the importance of non‐financial environmental information to investors in their assessment of firm value.

The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Strategic Advantage?

This study investigates the impact of environmental regulatory delay on capital market reactions to capital expenditure announcements. Using the time to gain resource consent (regulatory) approval as an indicator of expected resource consent compliance costs, positive valuation effects are found from project announcements when the expected time to gain resource consent approval is long. The findings suggest that by undertaking voluntary capital expenditures with high environmental compliance costs, listed companies can create strategic advantages. For example, long consent times may improve firms’ opportunities to develop specialised capabilities such as early mover advantages, reputational benefits, or enhanced environmental management systems. Alternatively, high environmental compliance costs may inhibit actions by industry competitors and new entrants, resulting in greater expected project NPVs.

Stock market reaction to capital expenditure announcements by UK firms

The key objective of this article is to analyse the stock market reaction to capital expenditure announcements by UK firms. To attain such an objective, we adopt an ‘event study’ methodology. We analyse a large sample of 884 capital expenditure announcements made by 426 companies allocated in different sectors over a period of 14 years from 1990 to 2003. The results suggest a significant and positive relationship between capital spending announcements and share prices. Our results also suggest a positive (negative) and significant relationship between announcements of increase (decrease) in capital expenditure and abnormal stock returns. Market participants seem to respond positively to corporate capital expenditure decisions regardless of the types of projects in which the funds are to be invested.

The market reaction to capital expenditure announcements

The theory of the firm regards investment decisions as one of the fundamental and central activities of the modern firm. The normative aspect of the theory claims that firm resources should be allocated to value-creating positive NPV projects. The current literature has mostly focused on managerial behaviour in advanced economies and has reported evidence that shareholder wealth is positively affected when firms make capital spending decisions (Woolridge (1988) and McConnell and Muscarella (1985)). Recent work by La Porta, Lopez-de-Silanes, Shleifer and Vishney (2002) and Shleifer and Vishney (1997) document that corporate environments in emerging economies differ quite significantly from those in advanced economies. Claessens, Djankov, and Lang (2000) also report that many emerging markets are dominated by companies which have high ownership / asset concentration, and which are large in size and function as conglomerates. Berger and Ofek (1995) suggest that greater agency costs are incurred when firms engage in conglomeration. Accepting negative net present value projects and misallocating resources toward inefficient divisions are a manifestation of these agency costs, which negatively impact firm value (Jensen and Meckling (1976) and Mansi and Reeb (2002)). Insights from the published literature imply that these problems are likely to be more severe for firms that are operating in countries with majority share ownership and asset concentration, suggesting that the nature of managerial decisions made in emerging economies require empirical examination. This paper has three aims. The first is to conduct an event study of capital investment announcements to measure whether the investment decisions of South African companies are consistent with the goal of maximizing shareholder wealth. The second aim is motivated by a unique attribute of the South African economy. In addition to being classified as an emerging market, the South African economy is also dominated by large groups of holding companies, which are highly diversified (Castle and Kantor, 2000). Many of these conglomerates are managed by founding families and their descendents (Kantor, 2001). It has been reported that many local companies stray from their core activities into diversifications that lack any business logic (Gerson, 1992). In light of these important characteristics of the South African business structure, this paper also examines whether the wealth effects of capital expenditure announcements differ between diversified firms and focused firms. The third aim of this paper is to investigate whether the market reaction to capital expenditure announcements varies with the category of projects being announced, as well as other characteristics of the investment and the company making the announcement.

An empirical investigation of capital expenditure announcements

The market reaction to capital expenditure announcements is studied in the backdrop of Jensen's (1986) free cash flow hypothesis. Initial results confirm McConnell and Muscarella's (1985) original findings suggesting that announcement-period returns follow in sign announced changes in capital spending. Moreover, estimating regressions similar to Lang et al. (1991) provides evidence that is somewhat weak, supportive of the free cash flow hypothesis in explaining announcement-period returns. Finally, an alternative information-signalling explanation for the market reaction cannot be ruled out entirely.

Agency Problems and Capital Expenditure Announcements

This article examines the market valuation of announcements of new capital expenditure. Prior research suggests that the firm's growth opportunities and cash flow position condition the market response. This study jointly examines the role of growth and cash flow, and the interaction between them. Using a new data set of Australian firms that avoids problems associated with expectations models, the results are remarkably strong and support a positive association between growth opportunities and the market valuation, in addition to supporting the role of free cash flow. The findings have implications for the relationship between general investment information and stock prices.

Capital expenditure announcements and anti-takeover barriers

In this paper, we compare capital budget announcements by firms with anti-takeover mechanisms in place to announcements by firms without takeover barriers during the period 1980 to 1995. We find that anti-takeover provisions do not affect investors’ average reactions to investment choices. Market responses are heterogeneous; however, and differ according to size, growth opportunity, the availability of free cash flow and exposure to the capital markets. We find evidence consistent with managerial entrenchment when firms are insulated from the threat of takeover and have enough free cash flow to avoid raising external capital. We also find that for small firms, the reaction to capital investment announcements are positively related to free cash flow when managers have high growth opportunities, but negatively related when investment opportunity is small. This result is consistent with Noe (1988), who shows that restricting managers’ investment choices to positive NPV projects is necessary to obtain the pecking order results of Myers and Majluf (1984).

The Stock Market Reaction to Investment Announcements: The Case of Individual Capital Expenditure Projects

In this paper we provide novel evidence about the market reaction to capital expenditure announcements in the UK using a sample of nearly 500 disclosures made between 1989 and 1991. First, we show that the market reaction to joint venture announcements is significantly positive, whilst similar announcements from individual companies do not elicit any response. Second, we find that the market reaction to single company investments is positively related to the size of the expenditure, but only for projects which immediately generate cash. Finally, we report that the variability in the market response to announcements which follow large cash inflows is significantly lower than the variability in investors’ reactions to announcements which are not preceded by such inflows.

Cash Flow and Capital Spending: Evidence from Capital Expenditure Announcements

Pecking-order and free-cash-flow behavior are two explanations for the reliance of US corporations on cash flow from operations to finance capital expenditures. However, each explanation has different implications for financial management; cash flow hoarding for the former and cash flow payout for the latter. The empirical findings in this article suggest that firm size plays a significant role in determining appropriate financial policy for corporations.

Market Response to Product-Strategy and Capital-Expenditure Announcements in Singapore: Investment Opportunities and Free Cash Flow

Market Response to Product-Strategy and Capital-Expenditure Announcements in Singapore: Investment Opportunities and Free Cash Flow

On “q”

AbstractThe introduction of Tobin's q‐ratio in the literature has prompted noteworthy advances in economic model‐building and empirical analysis. A major shortcoming has been the lack of a convincing measure of marginal q. Herein an alternative approach for measuring marginal q is presented, one based on an event study of capital expenditure announcements. The measures of marginal q are shown to yield reasonable and consistent estimates. The marginal q variables perform well against the hypothesized relationships developed from q theory. A key result is that classifying firms according to their average q measures as a proxy for marginal q is likely to lead to misclassification problems.

Shark Repellents and Managerial Myopia: An Empirical Test

Since the proxy fights of the 1950s, commentators have debated the welfare implications of corporate takeovers. Although observers such as Manne (1965), Jensen and Meckling (1976), Fama (1980), and Jensen and Ruback (1983) argue that the market for corporate control promotes efficiency and enhances wealth, some critics, such as managers of firms subject to hostile takeover attempts, contend that takeovers destroy firm value. The critics frequently assert that takeover pressure forces managers to sacrifice profitable, but slowyielding, long-term investments in favor of less productive short-term investments that offer immediate returns. While the evidence supporting takeover-induced shortsightedness is largely anecdotal, a recent paper by Stein (1988) develops a formal