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.