한국생산성학회

This study examines the institutional investor’s trading behavior around corporate’s capital expenditure announcements in terms of free cash flow hypothesis and the investment opportunities hypothesis. Jensen(1986) argues that managers will invest free cash flow in wasteful investments rather than pay it out to shareholders. The potential agency costs of capital expenditure are arguably higher for high-free cash flow firms. On the other hand, capital expenditure by low-free cash flow firms increase the chance the firm will seek new external financing. Free cash flow agency costs may depend on the firm's investment opportunities. Prior research shows that market reaction to a capital expenditure announcement is related to a firm’s investment opportunities, Tobin's q. Tobin's q is the ratio of the market value of the firm's assets to their replacement cost. There are evidences somewhat weak, supportive of the free cash flow hypothesis in explaining capital expenditure announcement-period returns. So, we investigate whether investment opportunities and free cash flow play an important role in explanation of the market response to such announcements. In other words, we tests the market response on capital expenditure announcements through investment opportunities hypothesis and free cash flow hypothesis. Most of the existing research on this area has used U.S data, but little is known about Korean evidence. Using KOSPI data over the period of 2000-2013, this paper mostly analyses the samples separated by Tobin's q and free cash flow. The main results are as follows; First, institutional investors tend to buy shares in the disclosure of capital expenditures by companies with many future investment opportunities and vice versa. But this relation is not significant in the OLS analysis. Second, low-free cash flow and high-q firms have a significant positive abnormal trading volume around the disclosure of capital expenditures, meanwhile high-free cash flow and low-q firms have an significant negative abnormal trading volume. But analysis for personnel investor’s trading volume shows insignificant relation with free cash flow or future investment opportunities. These results mean that institutional investors sell shares for companies with relatively small free cash flows and many future investment opportunities, while buy shares for those with relatively large free cash flows and little future investment opportunities.