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).