Finance

Stock Market Reaction To Strategic Investment Decisions

This research examines the stock market’s reaction to public announcements of corporate proper investment decisions. It includes a wide variety of strategic decisions: formation of joint endeavors, development, and research projects, major capital expenses, and diversification into new products and/or marketplaces. Three alternate hypotheses concerning the stock market’s reaction to announcements of these decisions are tested. The Shareholder Value Maximization hypothesis predicts an optimistic reaction to corporate and business investments because the stock market rewards managers for developing strategies that increase shareholder prosperity.

The Rational Expectations hypothesis predicts no stock-price reaction because traders expect managers to attempt periodic investments in order to keep their companies’ competitive fitness. The Institutional Investors hypothesis predicts a poor a reaction to announcements of corporate and business investments. The U.S. capital marketplaces are dominated by institutional traders, who, in pursuit of superior quarterly performance, may disdain longterm investments because they reduce brief‐term cash flow.

Analysis of 767 proper investment decisions announced by 248 companies in 102 sectors signifies that the stock market’s a reaction to strategic investments conforms most closely to the predictions of the Shareholder Value Maximization hypothesis. This overall finding holds for investments of varying size and duration. The implications of the positive reaction by the currency markets to investment announcements are drawn for corporate strategy research and management practice.

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