Agreement Hypothesis Influence to Capital Investment Announcements
Date Issued
2008
Date
2008
Author(s)
Chan, Yao-Hua
Abstract
I test agreement hypothesis influence to capital investment announcements. The empirical evidence support that the agreement effects show the same signal to both the manager and the investors. Therefore, the cumulative abnormal returns for high agreement firms are significantly larger than the cumulative abnormal returns for low agreement firms and the announced amounts for high agreement firms are significantly larger than the announced amounts for low agreement firms. Comparing to growth opportunities effects to market response for capital investment announcements, the agreement effects show additional explanatory power. Also comparing to free cash flow effects to capital expenditures, agreement effects show additional explanatory power too. I further identify the influence of cumulative abnormal returns resulted from different level of agreement for the manager’s degree of overconfidence. I find empirical evidence showing that overinvestment is the result of overconfidence. However, while the overconfidence decreases the long-run performance for high cash flow firms, it mitigates the underinvestment problem and increases values for low cash flow firms.
Subjects
Agreement Hypothesis
Capital Investment Announcements
Overconfidence
Free Cash Flow
Type
thesis
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