Is there a right time for corporate investment?
Abstract
Purpose
The purpose of this paper is to determine whether corporate investment in real fixed assets in hot issue markets leads to higher income to shareholders than that in other equity market conditions.
Design/methodology/approach
The authors address the research question in two steps: first, the authors identify how security issuances in hot and cold issue markets influence corporate investment decisions. Second, the authors examine how debt- and equity-financed investments in two different market conditions affect future holding period returns. The sample includes an unbalanced panel data set consisting of all non-financial and non-utility US companies from 1973 to 2006. The authors apply both firm- and industry-level fixed effect methods to estimate the coefficients of two separate empirical models.
Findings
The authors find that equity issuances increase firms' capital investments in hot issue markets. These equity-financed investments in hot equity markets result in higher returns to shareholders compared to those in other market conditions. Therefore, there exists a window of opportunity for firms to issue new equities and make investments, which in turn improve shareholders' wealth.
Practical implications
The findings convey a critical message to corporate managers about the right timing of equity-financed capital investments.
Originality/value
While earlier research focuses on determining a specific equity market condition that favours new issuances, this paper determines a particular equity market condition when firms typically choose value-enhancing equity-backed projects for investment.
Keywords
Acknowledgements
The authors thank Dr Hamid Uddin (Associate Editor), two anonymous referees, participants at the Society of Interdisciplinary Business Research 2013, and participants at the World Finance and Banking Symposium 2013 for their valuable comments on earlier versions of this paper. The authors are responsible for all the errors.
Citation
Maung, M. and H. Chowdhury, R. (2014), "Is there a right time for corporate investment?", Studies in Economics and Finance, Vol. 31 No. 2, pp. 223-243. https://doi.org/10.1108/SEF-08-2013-0112
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited