An empirical investigation of capital expenditure announcements

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.

Acknowledgements

The authors gratefully acknowledge helpful comments from Maurice Joy, Lenos Trigeorgis, Bill Beedles, and George Pinches, from workshop participants at the University of Cyprus and the University of Kansas, and from participants in a session of the International Financial Management Association Conference held in Zurich, Switzerland.