Agency Costs and the Short‐Run Stock Price Response to Capital Expenditures

25 Pages Posted: 21 Apr 2012

See all articles by Sungsoo Kim

Sungsoo Kim

Rutgers Business School - Camden; University of Minnesota Duluth

Eugene A. Pilotte

Rutgers Business School - Camden

Joon Sun Yang

Sogang University

Date Written: May 2012

Abstract

We estimate the short‐run stock price response to unanticipated capital expenditures. We use association study methodology to avoid the self‐selection bias in event studies and to facilitate construction of a large sample of firm‐years likely to exhibit agency problems. We find that the average price response to routine capital expenditures is negative, and that commonly used agency cost measures explain fully the negative response. Subsample results support the conclusion that the market is skeptical of cash flow financed spending by low‐q firms and even capital spending by high‐q firms when the firm is large and q is only marginally high.

Keywords: agency theory, agency costs, capital expenditures, investment

JEL Classification: G30, G31

Suggested Citation

Kim, Sungsoo and Pilotte, Eugene A. and Yang, Joon Sun, Agency Costs and the Short‐Run Stock Price Response to Capital Expenditures (May 2012). Financial Review, Vol. 47, Issue 2, pp. 375-399, 2012, Available at SSRN: https://ssrn.com/abstract=2042978 or http://dx.doi.org/10.1111/j.1540-6288.2012.00333.x

Sungsoo Kim

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6584 (Phone)

University of Minnesota Duluth ( email )

10 University Avenue
Duluth, MN 55812
United States

Eugene A. Pilotte

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6548 (Phone)

Joon Sun Yang

Sogang University

Seoul 121-742
Korea, Republic of (South Korea)

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