Investors’ rationality. An analysis of the investment policy implications on shares valuation

Abstract

The investment policy is an important vehicle of growth for a company. Therefore, it should be one of the most important signals for investors on the capital market. We use the statistical analysis of the investors’ reactions to different patterns of investment policy to highlight their preference for an active investment policy and the changes induced by the financial crisis. By a comparative analysis of investors’ preferences with the information on the accounting-based performance recorded simultaneously and in the future economic exercise, we focus on the extent and limits of the investors’ rationality around the financial crisis.

Investors’ Choices and Strategic Financial Decisions of the Companies. Evidence from an Analysis of the Capital Budgeting Policy Implications on Shares Valuation

“…We reported only the percentage from the comparison with the average levels because the ones from the comparison with the median are similar. We observed that the differences between the two classes of countries for category A were relatively small and that their evolution was similar to the one determined for the global market put in evidence in [27], thus providing the same conclusion: The markets were signaling a preference for higher levels of investment. This suggests that the country level of economic development did not have a major influence on the results of our analysis.…”

“…The results we obtained are presented in Table 7. The levels for category A are similar to the ones for the global market [27], indicating a signal for similar preferences. However, there was a difference in the evolution of these levels.…”

“…Based on these classifications, we chose, as a first methodological approach, to present a detailed descriptive statistical analysis of the phenomenon by taking into account different groupings of the countries included in the database. This provided a refined perspective of the results obtained by [27]. Although it is not a very complex econometrical process, it offers the possibility to observe how investors' preferences on issuers' capital budgeting policies reflect in the share prices.…”

“…We chose to conduct our analysis annually, in accordance with the methodology in [27], in order to be able to identify the effect of the financial crisis on investors' preference for an active capital budgeting policy and ultimately on investors' rationality. After eliminating the records for which either the information on capital expenditures or the P/Bv was missing, our final database characteristics are depicted in Table 1.…”

“…Our first objective was to study whether there were different patterns in the investors' preference for an active investment policy undertaken by the issuer in different groups of countries. To do so, following the methodology from [27], the database was separated first between developed and developing countries, then according to the countries' inclusion in OECD, and finally according to the type of national financing system. For each class mentioned, the companies included in the database were divided into two classes-companies with an aggressive capital budgeting policy and with a moderate one.…”