Company investment announcements and the market value of the firm

Jones, E., Danbolt, J. and Hirst, I. (2004) Company investment announcements and the market value of the firm. European Journal of Finance, 10(5), pp. 437-452.

Abstract

This paper examines the stock market reaction to 402 company investment announcements made by UK companies during the 1991-1996 period. The market-adjusted abnormal returns are generally positive but small. Investment announcements are classified according to functional categories, and we find the level of abnormal returns to vary according to the type of capital investment being announced. In particular, we find the market to react more favourably to investments that 'create' future investment opportunities, than to investments which can be categorized as 'exercising' investment opportunities. The market reaction also varies with firm size, with large companies tending to experience smaller responses to announcements than do smaller firms. Chung et al. (1998) reported that the quality of a company's investment opportunities is the primary determinant of market reactions to capital expenditure decisions. The findings presented here lend some support to a role for investment opportunities in market valuations. Project size is also found to have a significant positive impact on the level of abnormal returns.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Danbolt, Prof Jo
• Authors: Jones, E., Danbolt, J., and Hirst, I.
• Subjects: H Social Sciences > HF Commerce; H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: European Journal of Finance
• Publisher: Routledge
• ISSN: 1351-847X
• Copyright Holders: Copyright © 2004 Routledge
• First Published: First published in European Journal of Finance 10(5):437-452
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher