Does the Market React to the Reputation of Capital Expenditure?

Abstract

A phenomenon found in several case studies shows that investors are more interested in the projection of firm value than in periodic financial performance. Therefore, this study aims to determine whether the reputation of capital expenditure is an indication of a promising future for a company, so that it responds positively to the market. The research samples used were companies that had the highest increase in shares in their sectors during the Q1 2017 to Q2 2019 period. We used Tobin's Q (TQ) and cumulative abnormal return (CAR) as proxies for market response. The findings of this study are, first, that the market responded positively to the reputation of corporate capital expenditure, as seen from asset growth. Second, in the sample group with positive asset growth trends in the last five years, the reputation of capital expenditure, proxied by total assets and total fixed assets, consistently received positive responses from investors. Third, the market responded negatively, or had no response, to capital expenditure made by companies that had a negative growth trend. The results of this study invalidate the findings of previous studies that good financial performance responds positively. This study proves that the capital expenditure of a company is more of a concern to investors than its current performance.