INVESTMENT OPPORTUNITIES AND MARKET REACTION TO CAPITAL EXPENDITURE DECISIONS

In this study, we argue that share price reaction to a firm's capital expenditure decisions depends critically on the market's assessment of the quality of its investment opportunities. We postulate that announ cements of increases (decreases) in capital expenditures positively (n egatively) affect the stock prices of firms with valuable investment o pportunities. Contrarily, we predict that announcements of increases ( decreases) in capital spending negatively (positively) affect the shar e prices of firms without such opportunities. Our empirical results ar e generally consistent with these predictions. Overall, empirical evid ence supports our conjecture that it is the quality of the firm's inve stment opportunities rather than its industry affiliation which determ ines the share price reaction to its capital expenditure decisions. (C ) 1998 Elsevier Science B.V. All rights reserved.