Article2006

The Economic Impact of Corporate Capital Expenditures: Focused Firms versus Diversified Firms

40 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Abstract This paper examines the role of focus versus diversification in explaining the economic impact of corporate capital investments. I find that the stock market's responses to announcements of capital investments are more favorable for focused firms than for diversified firms. I also show that focused firms exhibit significantly better post-investment operating performance than diversified firms. The overall findings in this study suggest that the investment opportunities hypothesis dominates the internal capital markets hypothesis in terms of the net economic impact of capital investments on the investing firms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1977Determinants of corporate borrowing 1990Additional evidence on equity ownership and corporate value 1990Managerial discretion and optimal financing policies 1995Diversification's effect on firm value 1994Tobin's q, Corporate Diversification, and Firm Performance 1997Internal Capital Markets and the Competition for Corporate Resources

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