Company investment decisions and the market value of the firm
Abstract
This thesis examines the stock market reaction to 563 company investment
announcements 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 the level of abnormal returns is found to
vary according to the type of capital investment being announced. In particular, the
market is found to react more favourably to investments which ‘create’ future investment
opportunities, than to investments which can be categorised 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. Further
examination of the category of Research and Development announcements on the market
value of UK listed companies reveals that companies with a large proportion of their
common stock held by institutional investors experience reduced levels of abnormal
return. A significant negative relationship is found to exist between a dummy variable
representing large institutional ownership and abnormal returns suggesting that
institutions react less favourably to R&D projects than other types of investors. This
thesis also examines the impact of joint venture announcements on the market value of
UK listed companies. Using the market-adjusted returns method, a significant positive
abnormal return of 1.2% was detected on the announcement date. A cross-sectional
analysis revealed significant negative relationship between abnormal returns and market
capitalisation. A positive and significant relationship was detected for market-adjusted
returns with relative project size and domestic projects.