In this paper we study the market reaction to capital expenditure announcements in the backdrop of Jensen's  free cash flow hypothesis. Our initial results confirm McConnell and Muscarella’s  original findings suggesting that announcement-period returns follow in sign announced changes in capital spending. Moreover, estimating regressions similar to Lang Stulz and Walkling  we find 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.
Shenoy, Catherine, and N. Vafeas, 2005. The free cash flow effects of capital expenditure announcements. Applied Economics Letters 12, Nos. 14-15, p. 907-911. http://dx.doi.org/10.1080/1350485052000345564