CORPORATE INVESTMENT DECISIONS AND STOCKHOLDER RETURNS: AN EMPIRICAL ANALYSIS
Abstract
Finance decisions made by the management of a firm are often dichotomized under the two broad categories of financing decisions and investment decisions. Financing decisions have received a great deal of attention in the empirical literature of finance along with certain types of investment decisions (e.g., mergers and tender offers). This study is an investigation of how the announcement of a corporation's capital budget affects the value of a firm. The major contribution of the study is that it addresses, for the first time, the impacts of capital budgeting investment decisions. A model of the value of the firm proposed by Miller and Modigliani (1961) and Myers (1977, 1983) is presented as a starting point. A model of the corporate investment decision process is then developed. For firms with growth opportunities, the model predicts that an unexpected change in intangible asset investment will have no effect on the value of the firm, while an unexpected change in tangible asset investment will lead to a change in the value of the firm. Furthermore, the model predicts that if a firm has no growth opportunities available to it, then an unexpected change in tangible or intangible asset investment will have no effect on the value of the firm. This is an event-time study with the event being the announcement of a firm's capital budget. The research methodology employed is an analysis of the abnormal returns to stockholders around the announcement date. The results indicate that for regulated firms (firms with no growth opportunities) changes in tangible asset investment have no impact on stockholder wealth. For non-regulated firms (firms assumed to have growth opportunities) changes in intangible asset investment have no impact on stockholder wealth, while increases in tangible asset investment are associated with increases in stockholder wealth and decreases in tangible asset investment are associated with decreases in stockholder wealth. The results, en banc, are consistent with the proposed model of the corporate investment decision process.
Degree
Ph.D.
Subject Area
Finance
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