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Do shareholders appreciate capital investment policies of corporations?

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  • Lu, Jin-Ray
  • Hwang, Chih-Chiang
  • Lin, Chien-Yi

Abstract

When it comes to capital investment problems, shareholders have a desire to adjust their holdings of corporate stock in response to corporate investment decisions, such that the holding rate can be seen as favorable or unfavorable response to the firm's capital investment policy. By employing both real options and portfolio selections theories, we propose an optimal decision regarding shareholders' portfolio choices in order to identify their preferences in terms of corporate investment choices. Making decisions about stockholdings involves taking into account the risk–return characteristics of firm value, equity value, and project value. We find that shareholders prefer to keep more corporate stocks if the firm invests in a project with a high initial value, high growth rate, and low risk. Moreover, shareholders favor a corporate investment policy with low capital expenditures and a low debt-financing policy.

Suggested Citation

  • Lu, Jin-Ray & Hwang, Chih-Chiang & Lin, Chien-Yi, 2016. "Do shareholders appreciate capital investment policies of corporations?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 344-353.
    • Handle: RePEc:eee:reveco:v:43:y:2016:i:c:p:344-353
    DOI: 10.1016/j.iref.2015.12.007
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    More about this item

    Keywords

    Portfolio selection; Capital investment; Real options;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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