Capital expenditure decisions have a long-term effect on the value of the firm. Extant literature posits that stock prices of companies increase very quickly to incorporate such information. However, limited research has been undertaken in this area in India and thus the motivation for the present study. This paper examines stock market reaction to the announcement of 493 capital expenditure decisions made by companies during the period January 1, 2004 to December 31, 2006. An event study methodology is used to examine the share price behavior around such announcements. Results indicate that the market reacts significantly on the day of announcement, thus reflecting that it views such decisions as value enhancing. The study also looks at the size effect of capital expenditure decisions. Results show that the reaction of the Indian stock market is statistically, positively significant for large investments, and positive but insignificant for small investments. The results of the study are in sharp contrast to the international evidence.

The financial managers of companies have always remained concerned with the ever-pertinent questions: In what kind of physical assets should a firm invest? What are the investment opportunities available to a firm at a given point in time? Are these investments in assets required to sustain the operations of the business? And how do the shareholders view such decisions keeping in view the agency problem associated in running large firms? Does the stock market view such long-term investment decisions as maximizing the wealth of the shareholders or are they viewed as squandering of shareholders' money? There is overwhelming evidence which suggests that long-term capital expenditure decisions by companies are viewed favorably by the stock markets (McConnell and Muscarella, 1985; Chan et al., 1990; Woolridge and Snow, 1990; Chan et al., 1995; Jung et al., 1996; and Jones, 2000); that is to say, the stock market generally rewards the long-term decisions of firms. Stock price reactions to financial managers' long-term investment decisions can provide important insight, which could improve capital budgeting decisions if shareholders are well informed and it becomes much easier for the managers to tap the capital markets to finance value-enhancing projects. In the case of an emerging market like India, research in this area is by far sparse and one does not know the reaction of the stock markets to such decisions, hence the motivation for the present study. This study analyzes the behavior of share prices at the time of announcement of capital expenditure decisions by the Indian companies in order to determine whether such decisions are viewed as enhancing shareholder value or not. It also seeks to test whether the reaction of the market is different for large and small investments by Indian companies. In line with the earlier evidence, the results of the study show that the Indian stock market witnesses abnormal returns on the day of announcement of capital expenditure decisions by companies in the press till the day after the announcement.

Applied Finance Journal, Capital Expenditure Decisions, Capital Budgeting Decisions, Research and Development, R&D, Milan Stock Exchange, MSE, Market Capitalization, Centre for Monitoring Indian Economy, CMIE, Cumulative Abnormal Returns, CARs, Abnormal Returns.