Date of Award

Spring 1996

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

John Doukas

Committee Member

Mohammad Najand

Committee Member

Vinod Agarwal


This study examines the effects of corporate investment decisions--announcements of plants--on the value of the firm, using event-study methodology. This paper consists of two parts. Essay I discusses the valuation effects of domestic investments, while Essay II analyses the valuation effects of foreign investments undertaken by U.S. firms and compares the valuation effects between the two investments. Specifically, this study examines the validity of the overinvestment hypothesis and whether focus-increasing investments enhance the value of the firm.

First, the evidence shows that the valuation effects of the investment decision depend on the firm's investment opportunities, proxied by Tobin's q. That is, the domestic and foreign plant announcements of value-maximizing finns (i.e., q >1) earn significant positive abnormal returns, while those of overinvesting firms (i.e., q < 1) realize significant negative abnormal returns. Also, for value-maximizing firms, the abnormal returns are positively but insignificantly related to the level of cash flows, while, for overinvesting firms, the abnormal returns are negatively related to the level of cash flows. These results suggest that managers of overinvesting firms are more likely to waste cash flows in sub-optimal or negative net present value projects than managers of value-maximizing firms. The evidence is consistent with the predictions of the overinvestment hypothesis (Jensen (1986), Lang and Liztenberger (1989), Doukas (1995)).

Second, for both domestic and foreign investments, focus-increasing investments are found to gain positive abnormal returns, whereas diversifying domestic and foreign investments experience significant negative abnormal returns. Further, post-investment performance tests show that firms with focus-increasing investments tend to improve their profitability, while firms with diversifying investments do not. This evidence appear to support the view (Lang and Stulz (1994)) that increases in corporate focus are consistent with shareholder wealth maximization.

Overall, the results suggest that the valuation effects of corporate investment decisions depend on the firm's investment opportunities and the type of investment decisions pursued by the managers.