Announcements of changes in capital spending and management ownership of the firm: Is there a relation?
Abstract
McConnell and Muscarella (1985) find a statistically significant, positive relation between the announcement of a change in the capital budget and the stock price for non-regulated firms. One of their caveats, however, is their use of a naive expectations model of capital expenditures in which any change in a firm's capital budget is unexpected. The first part of this study uses a different expectations model. Value Line publishes a predicted capital budget, which is used as the benchmark against which the announcement is compared to measure "unexpected" changes. This refined expectations model will hopefully provide a better basis for the measurement of the announcement effects. The primary goal of this study is to investigate whether there is a relation between the announcement return and the percentage ownership of the firm by management. The results indicate that Value Line's predicted capital budget is not more characteristic of investors' expectations than is the naive model. Therefore, Value Line's predictions probably should not be used alone as the basis for capital spending levels in future studies in this area of research. The results in the second part lead to several possible explanations. There is some indication that there is no logical statistically significant relation between $\alpha$ and the announcement return on the firm's stock. But, of course, there is the possibility that a relation exists, but its form is yet undiscovered.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Business community|Finance
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