This study is concerned to examine the connection between signals in stock market prices and investment announcements. The intention was to establish the degree to which investment response was fully (efficiently) discounted into share prices and whether the stock market signals actually resulted in real resource consequences. This study investigated the following three questions: 1. Do companies translate high stock returns into increased investment expenditure either with or without increased access to external funds? If the answer is affirmative, then what are the time lags involved? 2. Additionally, does investment expenditure, presumably on the basis of forward looking, in response to future opportunities, influence subsequent stock market returns? In other words, are stock market returns a function of prior investment expenditure? If yes, then how long does it require to be effective? 3. Are there any significant differences across and within sectors? The existence of these relationships was examined in terms of 640 UK public companies over the period 1979-1988. Using cross section time series data, regression analysis shows that prior abnormal returns have a significant positive influence on subsequent investment expenditure. In simple regression, there is also a strong positive link between investment and abnormal returns but within a simultaneous specification the result is a small but positive feedback of investment into abnormal returns. This supports a conclusion that allocation of more resources to investment is an anticipated consequence when abnormal returns arise and secondly that there is, even then, a small positive impact when the anticipated investment occurs. As a result, the market efficiency was confirmed with 2-3% inefficiency, and the idea of market effectiveness was also confirmed. In answering the third question, a variety of issues arose. First, in terms of investment response to abnormal returns, it was observed that there are differences in the behaviour of managers and investors given the different status of firms, size, type and period of projects. Managers are more attentive to the signals from the market during the growth stage and react negatively when the firm is in a decline stage. The reaction of investors, on the other hand, is strongly negative when they anticipate that firms are in a decline stage and positive when they anticipate that firms are in a growth stage. The weaker response of investors to long-term projects compared to short-term ones supported the idea of short-termism. On the other hand, managers were found to react more strongly to abnormal returns in sectors characterized by long-term projects.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:633688 |
| Date | January 1993 |
| Creators | Assiri, Batool K. |
| Publisher | University of Manchester |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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