Investment opportunities and market reaction to capital expenditure decisions |
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| Institution: | 1. School of Economics and Management, Shihezi University, Shihezi 832003, China;2. Henley Business School, University of Reading, Reading RG6 6UD, UK;3. School of Economics and Business Administration, Chongqing University, Chongqing 400030, China;4. Surrey Business School, University of Surrey, Guildford, Surrey GU2 7XH, UK;1. Istanbul Medeniyet University, Ünalan Mah. Ünalan Sok., D-100 Karayolu Yanyol, 34700, Üsküdar, ?stanbul, Turkey;2. Istanbul Technical University (ITU), Macka 34367, Istanbul, Turkey;1. Nottingham University Business School, Jubilee Campus, Nottingham NG8 1BB, United Kingdom;2. The University of Sheffield, Management School, Conduit Road, Sheffield S10 1FL, United Kingdom |
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| Abstract: | In this study, we argue that share price reaction to a firm's capital expenditure decisions depends critically on the market's assessment of the quality of its investment opportunities. We postulate that announcements of increases (decreases) in capital expenditures positively (negatively) affect the stock prices of firms with valuable investment opportunities. Contrarily, we predict that announcements of increases (decreases) in capital spending negatively (positively) affect the share prices of firms without such opportunities. Our empirical results are generally consistent with these predictions. Overall, empirical evidence supports our conjecture that it is the quality of the firm's investment opportunities rather than its industry affiliation which determines the share price reaction to its capital expenditure decisions. |
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