1、1Market Reaction to Investment AnnouncementsAbstract. Based on 897 new investment announcements from 2007 to 2009 by Shanghai and Shenzhen Stock Exchange， We firstly penetrate the investors reaction to new investment announcements in the Chinese capital market. We find a negative stock price reactio
2、n to new investment decisions. This is consistent with Institutional Investor hypothesis. The higher evaluation for under-investment companies than over-investment companies reflects that the Chinese capital market has released the problem of investment efficiency. Finally， because of the soft budge
3、t constraint， we find the market will give a higher assessment for state owned companies than non-state owned. Key words： investment announcement market reaction investment efficiency ownership nature 1.Introduction In the continuous operation of enterprise， investment and reinvestment is the necess
4、ary stage for the production and expanded reproduction. The decision of investment will definitely bring a big shock to the statement of cash flow in a certain period. If the market is efficient， the stock price 2will adjust to the change of the cash flow. From the trend of the stock price， we can o
5、bserve the market view on managers decision. Since the first empirical study from McConell and Muscarella in 1985， foreign scholars start a series research on market reaction to investment announcements in foreign capital market. However， generated from the restructure of state-owned enterprises， th
6、e Chinese securities market has a unique capital environment. Inheriting the former state-owned enterprises， many list firms make unscientific investment decision and utilize bank funds to expand blindly. In addition， China doesnt have perfect manager market and the effective incentive system and re
7、straint mechanism for managers have not established， so the managers have the motivation to use free cash flow for the excessive investment and the construction of the “Corporate Empire”. According to the data of the National Bureau of Statistics， Chinas investment rate keeps at a high level since 1
8、998 and overheating investment condition persists. In this paper， we aim to take a preliminary analysis on stock market response to the investment announcement in China. 2.Literature review The scholars start their study from two basic directions. 3On the one hand， they inspect the market reaction t
9、o the investment. Grounded on the American capital market， McConell and Muscarella（1985 ） find a positive abnormal return when issuing the investment announcements （ CAR=1%）. Parallelly， Brailsford （2004） and Kim et al. （2005） have tested the stock market in Australian and South Korean respectively，
10、 verifying the similar results. However， using the data from British security market， Burton （1999） cant find obvious abnormal response from investors. The further research for Kim et al. （ 2005） shows that only the joint investment will receive the positive evaluation and the single companys invest
11、ment can not induce obvious response from market. On the other hand， many people explore the discrepancies of market reactions to different investment announcements. Saeed Akbar（2008） divided the investments into four categories according to the purposes， finding that the investment for the equipmen
12、ts and plants will acquire more positive reaction. Sheng-Syan Chen et al. （2000） ， limiting the sample to the multinational joint investment in Singapore market and employing the T-test and Kruskal-Wallis test， find that companies with good investment opportunities will get higher evaluation. With m
13、ergers and acquisitions announcements， Lang 4（1991） applies the Tobin Q and free cash flow as two-dimensional variables to divide the notices and discovers that the group with the low Tobin Q and high free cash flow receive the lowest abnormal return. 3.Theoretical background and hypothesis Accordin
14、g to the theory of Shareholders Value Maximization， the managers will make the decision in order to maximize the shareholders value in the constraint and incentive of a series of contracts and mechanisms. Especially in the market of asymmetric information， in order to release a positive signal， the
15、company must maintain a high level of profitability and dividend rate so that they will only invest in the project bringing the positive NPV. H1a （Theory of Shareholders Value Maximization）： The market will give a positive reaction to the investment announcement. According to the institutional inves
16、tor theory， institutional investors are not long-term buyers and they have to achieve a certain performance standard in a short period. Otherwise， they will face the huge payment risk. Then if the company cant keep the short-term profits， they will be out of the game. In the real market， the institu
17、tional investors 5have scale advantages in funds technology and talents， and the individual investors payment for the information is far not compared to the institutional. So the individual will follow the institutional who owns more effective information， which lead the short-term oriented strategy
18、 can be more widely implemented in the stock market. H1b （Institutional Investor Theory）： The market will give a negative reaction to the investment announcement. According to the completely competitive market hypothesis， buyers and sellers are so enormous that they are the recipient of price， and t
19、he resource can flow freely. If there is any positive NPV project， other competitors can join in the market without any friction cost， lowering the product price or pushing up the factor price and finally compressing the margin. Therefore， any positive NPV project can only keep a short term and the
20、market will soon return Pareto Equilibrium. H1c （Rational Expectation Theory）： The market wont give any obvious reaction to the investment announcement. The companies with inefficient investment will acquire positive evaluation， because the investment decision may signal that they can raise enough m
21、oney to invest positive NPV project or even implicate that enterprises financing 6environment has been improved and the financing channels become smoother. However， the over-investment enterprises will be suspected to waste large amounts of cash flow on the low return project or event aim to build t
22、he “empire enterprise”， then they will face the negative response. H2： the under-investment enterprise can get a higher evaluation of investment. Many scholars have certified that excessive expansion strategy of enterprise will increase the possibility of financial distress. But if state-owned firms
23、 sticking in financial distress will bring a lot of trouble to the government， such as high unemployment rate and weakened control of one certain industry. Out of “Paternalism”， the government will increase investment， offer tax reduction and exemption， demand banks to increase the loan amount and e
24、xtend the loan time and other support， which is called “soft budget constraint” proposed by Komai. H3： In over-investment sub-sample， the investment announcements from state-owned firms can get higher evaluation than that from private firms. 4.Data and Methodology We select the 897 investment announ
25、cements from 2007-2009 7manually from the official websites of Shanghai and Shenzhen Stock Exchange. We obtain other variables from CCER and SCMAR database. INVt means new investment in year t； INV t-1， CFt-1， Growth t-1， Lev t-1， Size t-1， Cash t-1 respectively refers to the new investment， operati
26、on cash flow， growth opportunity， assets-liabilities ratio， size of assets and cash holding in year t-1. If the regression residual0， we define the sample as over-investment； If the regression residual0， we define the sample as under-investment. 5. Results In order to observe the market reaction to
27、the investment announcement， we utilize the T test of five days CAR （-2， 2）. After-event period （1， 2） is to absorb all of the market reaction， because the market needs the time to digest the whole information. Meanwhile， taking into account the situation that the information about the investment pl
28、an might be leaked in advanced， we employ the before-event period （-2， -1）. From the table1， we can see the mean of CAR （-2， 2） is 1.14%， significant at 1% level. This result means that the market make the negative reactions to investment 8announcement， verifying the institutional investor theory. I
29、n addition， the CAR （-5， 5） and CAR （-10， 10） show the similar results. Then we exam the T test on the CAR of two groups respectively （over-investment and under-investment）. Simultaneously， we practice the statistics test on the difference of the CAR （-2， 2） between these two groups. From table2， we
30、 find that the CAR of under-investment group is 0.59% higher than the over-investment， significant at 10%. This result verifies our hypothesis2： the market can recognize the problem of investment efficiency and will give higher evaluation to the investment announcement of the under-investment enterp
31、rises than that of over-investment. In the robust test， the CAR （-5， 5） and CAR （-10， 10） reach the similar results. Chinas capital market was born in a special environment， thus generating huge difference between state-owned enterprises and private enterprises. For the observation of the ultimate p
32、roperty rights impact on the market reaction， we divide the over-investment sample into two parts and implement the T-test respectively. At the same time， we test the difference of market reaction between two sub-samples. As the table3 shown， the CAR （-2， 2） of the state-owned firms is 1.63% higher
33、9than that of private firms， significant at 5%. CAR （-5， 5） and CAR （-10， 10） give the similar results， which verify the hypothesis3. 6.Conclusion Through the analysis of 897 investment announcements released from Shanghai and Shenzhen Stock Exchange， we find that the market will give the negative r
34、esponse to the investment decisions because of the short-sight behavior of the institutional investors. In addition， we have further found that the over-invest companies will get lower evaluation. To some extent， this phenomenon reveals that the efficiency of investment has cause the concern of Chin
35、ese capital market. Finally， based on the particularity of china stock market， we verify that in over-investment condition， the investment announcements from state-owned firms can get higher evaluation than that from private firms. This paper firstly researches the market reaction to the investment
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