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

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.