Stock Market A REACTION TO Strategic Investment Decisions

This study examines the stock market’s a reaction to public announcements of corporate and business tactical investment decisions. It includes a wide variety of strategic decisions: formation of joint ventures, research, and development projects, major capital expenditures, and diversification into services and/or marketplaces. Three alternate hypotheses regarding the stock market’s a reaction to announcements of these decisions are examined. The Shareholder Value Maximization hypothesis predicts a positive reaction to corporate 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 to be able to maintain their firms’ 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 investors, who, in search of superior quarterly performance, may disdain longterm investments because they reduce short‐term revenue.

Analysis of 767 strategic investment decisions announced by 248 companies in 102 industries indicates 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 keeps for investments of varying size and period. 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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