Investment Opportunities,Free Cash Flow and Stock Valuation Effects of Corporate Investments: The Case of Taiwanese Investments in China

This paper examines the importance of investment opportunities and free cash flow in assessing the stock market reaction to announcements of cross-border investments in China by Taiwanese firms. Our results support the investment opportunities hypothesis that Taiwanese firms with favorable investment opportunities have significantly positive response to the announcements of their investments in China whereas firms with poor investment opportunities have negative response to such announcements. In contrast, we find no support for the free cash flow hypothesis. Our findings add to the understanding of the determinants of the wealth effect of cross-border investment decisions in the Asia-Pacific region.