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Stock price reactions as surrogates for the net cash flow effects of corporate policy decisions |
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| Authors: | William N. Lanen |
| Affiliation: | 1. Energy and Sustainable Development (ESD), Montpellier Business School, Montpellier, France;2. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;3. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;4. Lebow College of Business, Drexel University, Philadelphia, United States;5. Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad, Pakistan;1. Department of Industrial and Manufacturing Systems Engineering, University of Michigan–Dearborn, Dearborn, MI 48128, United State;2. Grado Department of Industrial and Systems Engineering, Virginia Tech, Blacksburg, VA 24060, United State;3. Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, IL 60208, United State |
| Abstract: | This paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions. The focus is on testing cross-sectional associations between cash flow effects and the underlying characteristics of affected firms. We find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision. Our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process. |
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