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An empirical investigation of capital expenditure announcements

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  • Nikos Vafeas
  • Catherine Shenoy

Abstract

The market reaction to capital expenditure announcements is studied in the backdrop of Jensen's (1986) free cash flow hypothesis. Initial results confirm McConnell and Muscarella's (1985) original findings suggesting that announcement-period returns follow in sign announced changes in capital spending. Moreover, estimating regressions similar to Lang et al. (1991) provides evidence that is somewhat weak, supportive of the free cash flow hypothesis in explaining announcement-period returns. Finally, an alternative information-signalling explanation for the market reaction cannot be ruled out entirely.

Suggested Citation

  • Nikos Vafeas & Catherine Shenoy, 2005. "An empirical investigation of capital expenditure announcements," Applied Economics Letters, Taylor & Francis Journals, vol. 12(14), pages 907-911.
    • Handle: RePEc:taf:apeclt:v:12:y:2005:i:14:p:907-911
    DOI: 10.1080/1350485052000345564
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    3. Vafeas, Nikos & Maurice Joy, O., 1995. "Open market share repurchases and the free cash flow hypothesis G35," Economics Letters, Elsevier, vol. 48(3-4), pages 405-410, June.
    4. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
    5. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 313-341, July.
    6. McConnell, John J. & Muscarella, Chris J., 1985. "Corporate capital expenditure decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 14(3), pages 399-422, September.
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    Cited by:

    1. Parmjit Kaur & Randeep Kaur, 2019. "Effects of Strategic Investment Decisions on Value of Firm: Evidence from India," Paradigm, , vol. 23(1), pages 1-19, June.

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