Effect of investments on fundamentals and market reaction on pre-operational and operational Brazilian companies for the period 2006-2012

Pereira, Marco Antonio; Securato, José Roberto; Sousa, Almir Ferreira de

doi:10.5700/rausp1223

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FINANCE & ACCOUNTING • Rev. Adm. (São Paulo) 51 (1) • Jan-Mar 2016 • https://doi.org/10.5700/rausp1223 copy

Effect of investments on fundamentals and market reaction on pre-operational and operational Brazilian companies for the period 2006-2012

Efeito dos investimentos nos fundamentos e na reação de mercado de empresas brasileiras pré-operacionais e operacionais do período de 2006 a 2012

Effect of investments on fundamentals and market reaction on pre-operational and operational Brazilian companies for the period 2006-2012

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This paper provides evidence on the market reaction to corporate investment decisions whose shareholder value is largely attributed to growth options. The exploratory research raised pre-operational companies and their operational pairs on the same economy segments. It had the purpose of investigating the existence of statistical differentiation from financial indicators that reflect the installed assets and growth assets, and then study the market reaction to changes in fixed assets as a signaling element about investment decisions. The formation process of operational assets and shareholder value almost exclusively dependent on asset growth stands out in the pre-operational companies. As a result, differentiation tests confirmed that the pre-operational companies had their value especially derived on growth options. The market reaction was particularly bigger in pre-operational companies with abnormal negative stock returns, while the operational companies had positive returns, which may indicate that the quality of the investment is judged based on the financial disclosure. Additionally, operational companies' investors await the disclosure to adjust their prices. We conclude that the results are consistent with the empirical evidence and the participants in financial markets to long-term capital formation investments should give that special attention.

Keywords:
capital investment; event study; installed assets; growth options

Author (Year)	Problem	Results
Lucchesi and Famá (2007)Lucchesi, E. P., & Famá, R. (2007, abril/maio/junho). O impacto das decisões de investimento das empresas no valor de mercado das ações negociadas na Bovespa no período de 1996 a 2003. Revista de Administração [RAUSP], 42(2), 249-260.	Check the existence of market reaction to investment announcement, taken at the beginning of the fiscal year and during the year.	Evidence of abnormal returns, especially for announcements at the beginning of the fiscal year.
Brailsford and Yeoh (2004)Brailsford, T. J., & Yeoh, D. (2004, April). Agency problems and capital expenditure announcements. The Journal of Business, 77(2), 223-256.	Check market reaction to announcements of capital investments in the presence of growth opportunities, cash flow and control variables (investment size, performance management, shareholder control and leverage).	Evidence that the abnormal returns have the presence of growth opportunities as the dominant influence.
Antunes and Procianoy (2003)Antunes, M. A., & Procianoy, J. L. (2003, jan-fev-mar). Os efeitos das decisões de investimentos das empresas sobre os preços de suas ações no mercado de capitais. Revista de Administração [RAUSP],38(1), 5-14.	Check for the market reaction to the announcements variation of non-current assets and fixed assets.	Evidence of abnormal returns for the non- current assets and fixed assets.
Chung et al. (1998)Chung, K. H., Wright, P., & Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decisions.Journal of Banking & Finance, 22, 41-60.	Check for the market reaction to announcements made by investment firms categorized by the quality of its past investments through Tobin's q.	Evidence of favorable reaction for the high quality and unfavorable for low-quality businesses.
Szewczyk et al. (1996)Szewczyk, S. H., Tsetsekos, G.P., & Zantout, Z. (1996, Spring). The valuation of corporate R&D expenditures: evidence from investment opportunities and free cash flow. Financial Management, 25(1), 105-110.	Check for the market reaction to announcements of investments in R & D by companies classified by Tobin's q, by the size of free cash flow and technological level.	Evidence of positive abnormal return for companies classified with higher Tobin's q, positive for high-tech companies and negative for low-tech companies.
Chen and Ho (1997)Chen, S. S., & Ho, K. W. (1997, Autumn). Market response to product-strategy and capital expenditure announcements in Singapore: Investment opportunities and free cash flow. Financial Management, 26(3), 82-88.	Check for the market reaction to corporate investment announcements classified by Tobin's q and by the size of free cash flow.	Evidence of abnormal return for companies with higher Tobin's q.
Blose and Shieh (1997)Blose, L. E., & Shieh, J. C. P. (1997, August). Tobin´s q-ratio and market reaction to capital investment announcements. The Financial Review, 32(3), 449-476.	Check for the market reaction to announcements of investment companies classified by Tobin's q.	Evidence of positive abnormal return for companies with higher Tobin's q.
Chan et al. (1995)Chan, S. H., Gau, G. W., & Wang, K. (1995, March). Stock market reaction to capital investment decisions: Evidence from business relocations.Journal of Financial and Quantitative Analysis, 30(1), 81-100.	Check for the market reaction to announcements of asset reallocation.	Positive evidence for favorable impact on cash flow and negative to unfavorable impact on growth options.
Woolridge and Snow (1990)Woolridge, J. R., & Snow, C. C. (1990). Stock market reaction to strategic investment decisions. Strategic Management Journal, 11, 353-363.	Check for market reaction to announcements of strategic investments.	Positive evidence to the announcements.
McConnell and Muscarella (1985)McConnell, J. J., & Muscarella, C. J. (1985, September). Corporate capital expenditure decisions and the market value of the firm.Journal of Financial Economics, 14(3), 399-422.	Check for the market reaction to announcements of plans for capital investments.	Positive evidence for announcements of increase in investments and negative for announcements of reduction.

Variable	Hypothesis	Result
Variable	Hypothesis	Expected	Argument
ACAT	H_0,1	Pope > Ope	Net financial resources for the formation of corporate capital Pope represent significantly higher portion.
CAFAT	H_0,2	Pope > Ope	Idem.
ANCAT	H_0,3	Indifferent	The net non-current assets of the companies Pope grows at a faster rate while the Ope has assets being depreciated and may have a balance of goals.
RLAT	H_0,4a	Pope < Ope	The absence of revenues and profits in the pre-operational period affects the Pope profitability indicators. Moreover, not activated spending could adversely affect the outcome.
LLRL	H_0,4b	Pope < Ope	Idem.
DPL	H_0,5	Pope < Ope	Capital formation requires high capitalization, especially from own resources, which should result in lower debt to the Pope.
VMPL	H_0,6a	Pope > Ope	The market value of the pre-operational companies is grounded in the value of growth opportunities as opposed to operational companies that have most of their value coming from the installed assets.
ATPLVMAT	H_0,6b	Pope > Ope	Idem.

Variable		N	Minimum	Maximum	Mean	Standard Deviation
ACAT	Pope Ope	24 24	,08 ,19	,81 ,31	,5029 ,2347	,16623 ,03409
CAFAT	Pope Ope	24 24	,07 ,04	,72 ,11	,4148 ,0763	,15683 ,02155
ANCAT	Pope Ope	24 24	,19 ,37	,92 ,48	,4927 ,4191	,16245 ,03331
RLAT	Pope Ope	24 24	,01 ,10	,07 ,63	,0362 ,3361	,01605 ,16418
LLRL	Pope Ope	24 24	-4,04 ,15	2,58 ,28	-,2277 ,1962	1,07241 ,03136
DPL	Pope Ope	24 24	,12 ,37	8,18 ,65	,8719 ,4551	1,97974 ,07657
VMPL	Pope Ope	22 24	1,34 1,04	6,12 3,95	3,5865 2,2169	1,29086 ,77949
ATPLVMAT	Pope Ope	22 24	1,25 1,02	4,49 2,44	2,6929 1,6134	0,89851 ,38219

Variable	Ranks				Test statistic
Variable	Group	N	ΣR^* * ΣR: Sum of the ranks	(ΣR)/N	M-W^ M-W: Mann-Whitney	W^* ***** W: Wilcoxon	Z	p-value
ACAT	Ope	24	348,00	14,5	48,000	348,000	-4,949	0,000
ACAT	Pope	24	828,00	34,5
CAFAT	Ope	24	320,00	13,33	20,000	320,000	-5,526	0,000
CAFAT	Pope	24	856,00	35,67
ANCAT	Ope	24	512,00	21,33	212,000	512,000	-1,567	0,117
ANCAT	Pope	24	664,00	27,67
RLAT	Ope	24	876,00	36,5	0,000	300,000	-5,938	0,000
RLAT	Pope	24	300,00	12,5
LLRL	Ope	24	780,00	32,5	96,000	396,000	-3,959	0,000
LLRL	Pope	24	396,00	16,5
DPL	Ope	24	761,00	31,71	115,000	415,000	-3,567	0,000
DPL	Pope	24	415,00	17,29
VMPL	Ope	24	403,00	16,79	103,000	403,000	-3,540	0,000
VMPL	Pope	22	678,00	30,82
ATPLVMAT	Ope	24	372,00	15,5	72,000	372,000	-4,222	0,000
ATPLVMAT	Pope	22	709,00	32,23

	Average abnormal returns (A̅R̅_t)											Var(A̅R̅_t)
	-5	-4	-3	-2	-1	0	+1	+2	+3	+4	+5	Var(A̅R̅_t)
Pope	-0,002	-0,001	-0,006	-0,009	0,005	-0,003	-0,004	-0,002	-0,007	-0,005	0,002	1,94E-05
Ope	0,002	-0,003	0,002	0,003	0,002	-0,003	-0,003	0,003	0,002	-0,002	-0,003	5,85E-06
Pope / Ope	-0,997	0,337	-2,531	-3,060	3,004	0,854	1,464	-0,812	-2,837	2,459	-0,516	3,310
Pope Accum	-0,002	-0,003	-0,009	-0,018	-0,013	-0,016	-0,020	-0,022	-0,029	-0,033	-0,032	-
Ope Accum	0,002	0,000	0,002	0,005	0,007	0,003	0,000	0,003	0,006	0,004	0,001	-
1Q Pope	-0,006	-0,003	-0,008	-0,019	0,004	0,013	0,007	0,010	0,004	-0,003	0,010	7,93E-05
1Q Ope	0,001	-0,003	-0,001	-0,004	0,001	-0,016	0,004	0,000	0,003	0,004	-0,009	3,90E-05
1Q Pope / 1Q Ope	-9,442	0,924	8,805	5,181	5,270	-0,778	1,808	26,921	1,091	-0,760	-1,154	2,034
1Q Pope Accum	-0,006	-0,008	-0,016	-0,035	-0,031	-0,019	-0,012	-0,001	0,002	-0,001	0,010	-
1Q Ope Accum	0,001	-0,002	-0,003	-0,007	-0,006	-0,022	-0,018	-0,019	-0,015	-0,012	-0,020	-
4Q Pope	-0,008	-0,004	-0,007	0,002	0,006	-0,002	-0,018	-0,013	-0,009	-0,007	-0,016	1,44E-04
4Q Ope	0,001	-0,003	0,002	0,004	0,001	0,001	0,000	0,005	-0,001	-0,004	-0,002	2,48E-05
4Q Pope / 4Q Ope	-8,821	1,143	-3,391	0,475	8,448	-1,368	-45,711	-2,504	7,818	1,548	8,380	5,823
4Q Pope Accum	-0,008	-0,012	-0,019	-0,017	-0,011	-0,012	-0,030	-0,042	-0,051	-0,058	-0,073	-
4Q Ope Accum	0,001	-0,003	-0,001	0,004	0,005	0,006	0,005	0,010	0,009	0,005	0,003	-

	Complete Sample		1^st Quartile		4^th Quartile
	Pope	Ope	Pope	Ope	Pope	Ope
N+	21	40	7	10	5	7
N	65	94	16	22	16	22
J	- 2,8528	- 1,4440	-1,0078	-0,7329	-3,0233	-2,9317
p-value¹ 1 Calculated by statistical function DIST.NORM.N() of Excel	0,2%	7,4%	15,7%	23,2%	0,1%	0,2%

Variable	Rank				Test Statistic
(Sample)	Group	N	ΣR^* * ΣR: Sum of the ranks	(ΣR)/N	M-W^ M-W: Mann-Whitney	W^* ***** W: Wilcoxon	Z	p-value
CAR	Pope	65	4421,00	68,02	2276,000	4421,000	-2,729	0,006
(Complete Sample)	Ope	94	8299,00	88,29
CAR	Pope	16	319,00	19,94	169,000	422,000	-,207	0,836
(1^st Quartile)	Ope	22	422,00	19,18
CAR	Pope	16	258,00	16,13	122,000	258,000	-1,597	,110
(4^th Quartile)	Ope	22	483,00	21,95

Departamento de Administração da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo Avenida Professor Luciano Gualberto, 908, sala F184, 05508-900 São Paulo / SP Brasil, Tel./Fax 55 11 3818-4002 - São Paulo - SP - Brazil
E-mail: rausp@usp.br

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[1] Marco Antonio Pereira, Doutor em Administração (Finanças) pela Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo (CEP05508-010 – São Paulo/SP, Brasil). E-mail:mantper@usp.br

	Pope	Ope	1Q Pope	1Q Ope	4Q Pope	4Q Ope
CAR_i(τ₁,τ₂)	-0,032	0,001	0,010	-0,020	-0,075	0,003
Var[CAR_i(τ₁,τ₂)]	2,13E-04	6,44E-05	8,72E-04	4,29E-04	1,59E-03	2,73E-04
	Pope/Ope		1Q Pope/1Q Ope		4Q Pope/4Q Ope
CAR_i(τ₁,τ₂)	-32,839		-0,492		-25,424
Var[CAR_i(τ₁,τ₂)]	3,310		2,034		5,823