Manejo eficiente de recursos

In contrast to the evidence relating to mergers and takeovers which indicates around zero abnormal returns or insignificant negative abnormal returns for bidders, most empirical studies on capital expenditure report a significant positive abnormal return.49

As mentioned in Chapter 1, there are several motivations for investigating physical asset expenditure announcements. One of the contributions is to provide evidence concerning the market reactions to physical asset expenditure announcements since the position in Australia concerning the market reaction is unclear. Although no hypothesis is developed concerning the market reactions to

49 _{For instance, both Chen and Ho (1997) and Chan, Martin, and Kensinger (1990) report a}

physical asset expenditure announcements in Australia, the market reactions will be examined as part of the thesis.

3.2 Growth opportunities

Several studies have investigated the valuation impact of capital expenditure announcements using the growth opportunities hypothesis. This includes Szewczyk, Testeskos and Zantout (1996), Chung, Wright and Charoenwong (1998), and Chen and Ho (1997). Because growth opportunities are not observable, these studies along with other studies such as Smith and Watts (1992), and Gaver and Gaver (1993), use either market to book ratio or q ratio as a proxy for growth opportunities. The discussion of growth opportunities was noted in the previous chapter. For brevity, Lang and Litzenberger (1989) demonstrate that a q ratio greater than unity is a necessary condition for a firm to be value-maximising.

Three studies which examine capital expenditure announcements, Szewczyk et al, Chung et al, and Chen and Ho (1997), all report similar results that positive abnormal returns around the announcements of increases in capital expenditure are associated with firms with high q ratios (q ratio of greater than unity). All these studies attribute the positive market reaction to an increase in firm value arising from the newly acquired growth opportunities. However, the market reactions to announcements of increases in capital expenditure by firms with low q ratios are mixed. While Chung et al report significant negative market reactions for low q ratio firms that announce capital expenditure increases, Szewczyk et al, and Chen and Ho report insignificant market responses to capital

expenditure increases made by low q ratio firms. However, all these studies report that the difference in abnormal returns between the high and low market to book groups is significant.

In the area of tender offers, Lang, Stulz and Walkling (1989), and Servaes (1991) argue that the q ratio reflects the perceived value of a firm’s investment opportunities and hence is an increasing function of managerial quality. Consistent with this argument, they find evidence that the abnormal returns to bidding firm shareholders from tender offers and takeovers are an increasing function of the q ratio. Furthermore, Bhabra, Bhabra and Boyle (1999) find evidence that the q ratio is an increasing function of market confidence in firm management.50

The above evidence suggests that for capital expenditure announcements, positive abnormal returns are associated with firms with high q ratios, and insignificant and negative abnormal returns are associated with firms with low q ratios. The evidence is consistent with the definition of the q ratio (or market to book ratio) which has been used in the existing literature as a proxy to distinguish between firms which have positive NPV investment opportunities under current management and those that do not. Firms with high q ratios are likely to have positive NPV projects. Hence, these firms are expected to invest their resources profitably. For these firms, if the physical asset expenditure announcements are unexpected, a positive market response is expected. In contrast, firms with low q ratio may not have positive NPV projects and for these

50 _{The q ratio referred to in Bhabra, Bhabra and Boyle (1999) is the market to book ratio as}

firms additional investments may not guarantee positive NPVs. Hence, it is hypothesised that:51

H1o There is no difference in abnormal returns associated with physical asset

expenditure announcements for either high or low market to book ratio firms.

H1a The abnormal returns associated with physical asset expenditure

announcements are greater for firms with high market to book ratios, compared to firms with low market to book ratios.

Alternatively, one might argue that the positive abnormal returns around the announcements of physical asset expenditure are the consequence of the equity market systematically over-extrapolating the performance of high market to book ratio firms, and vice versa for low market to book ratio firms. This is documented by Rau and Vermaelen (1998), who find evidence that the long-term underperformance of acquiring firms in mergers is predominantly found in high market to book ratio firms. They argue that these results are consistent with the performance extrapolation hypothesis. That is, the equity market extrapolates past performance too far into the future, and therefore overprices firms with high growth opportunities and underprices firms with low growth opportunities.52

51 _{In this thesis, firms with high (low) growth prospects are defined as those firms with a market}

to book ratio greater than (less than) the sample median. See section 5.3.1 in Chapter 5 for a description of measurement of growth opportunities.

52

Fama and French (1995) find that firms with low market to book ratios tend to have low profitability. Conversely, firms with high market to book ratios are those with strong profitability. That is, the performance extrapolation hypothesis is inconsistent with Fama and French’s (1995) findings.

The extrapolation hypothesis posits that the market reaction to high and low market to book firms is the result of performance extrapolation rather than due to the investment opportunities hypothesis. Hence, we examine the post announcement performance of high market to book ratio and low market to book ratio firms separately. Specifically, if the performance extrapolation prevails, one expects to see, for the high market to book ratio firms, a significant positive abnormal return at the announcement day. Over time as the market participants realise their valuation errors on the announcement day, the market begins to discount the high market to book ratio firms’ share prices resulting in negative post-announcement drift. In contrast, for the low market to book ratio firms, a negative abnormal return is expected on the announcement day. And as the market realises its valuation error over time, positive post-announcement drift is expected.

As a digression, the post-announcement drift is prima facie inconsistent with market efficiency.53 The performance extrapolation hypothesis is consistent with the fact that in the short-run, stock prices of glamour firms (represented by high market to book ratio) increase more than stock prices of value firms (represented by low market to book ratio) around the announcement of the acquisition [Lang, Stulz and Walkling (1989), and Servaes (1991)]. It is also consistent with the results of Hayward and Hambrick (1995), who report that takeover premiums are positively correlated with proxies of past managerial performance such as recent

53

In an event study, an instantaneous and unbiased price reaction would be observed immediately following the event. But thereafter, the cumulative abnormal return should have no pattern because there should be no further abnormal returns associated with the event. However, it should be cautioned that post-announcement drift can also result from sampling error. Explanation of post-announcement drift include shifts in risk following the announcement, which results in biased abnormal return measures, misspecification of the returns model, transaction

organisational success and media praise for the CEO. The equity market consistently fails to recognise that past performance is not necessarily a good indicator of future performance, at least in the case of acquisitions. This phenomenon is also persistently observed in profit announcements in both the USA and Australia.54

If the growth opportunities hypothesis prevails, no post-announcement drift is expected. Hence it is hypothesised in the null and alternative forms respectively that:

H2o No post-announcement drift in abnormal returns is observed for either

high or low market to book ratio firms.

H2a Positive post-announcement drift in abnormal returns is observed for low

market to book ratio, and negative post-announcement drift is observed for high market to book ratio firms.