An empirical investigation of capital expenditure announcements

Abstract

In this paper we study the market reaction to capital expenditure announcements in the backdrop of Jensen's [1986] free cash flow hypothesis. Our 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 Stulz and Walkling [1991] 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.