“The stock price reaction to investment news: New evidence from modeling optimal capex and capex guidance” by Mr. Jianchuan LUO
Mr. Jianchuan LUO
Ph.D. Candidate in Accounting
Leonard N. Stern School of Business
New York University
Extant literature documents a weak positive stock price reaction to announcements of new investments. The weak reaction is likely due to lack of identification for the optimal investment levels and omission of concurrent investment guidance. To address the lack of identification, I develop an accounting-variable-based model to proxy for optimal capital expenditures (capex) at firm-year level. To address the omission of concurrent investment guidance, I employ recently available data on capex guidance. I hypothesize and find that when a firm’s capex diverge from the estimated optimal level, its stock price declines. Given divergence, the stock price decline is more severe when the firm over-invests. Moreover, controlling for self-selection, there is a positive market reaction to the issuance of capex guidance. Lastly, I hypothesize that capex guidance reduces information asymmetry between management and investors. I find that the negative stock price reaction to divergence disappears when a firm issues capex guidance, consistent with that investors align their views on optimal capex level with a manager’s guidance.