Investment opportunities and market reaction to capital expenditure decisions

Abstract

In this study, we argue that share price reaction to a firm’s capital expenditure deci-sions depends critically on the market’s assessment of the quality of its investment op-portunities. We postulate that announcements of increases (decreases) in capital expenditures positively (negatively) aect the stock prices of firms with valuable invest-ment opportunities. Contrarily, we predict that announcements of increases (decreases) in capital spending negatively (positively) aect 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 in-vestment opportunities rather than its industry aliation which determines the share