Capital Investment and the Resolution of Uncertainty

In this paper, I analyze the relation between the information content of capital expenditure announcements and the resolution of uncertainty about firm performance. For non-oil investments, I find a positive market reaction to decreases in investment that reduce uncertainty and a negative market reaction to decreases in investment that increase uncertainty. I also find that managers cut spending when faced with financing constraints. When these spending cuts resolve uncertainty, the managers are more likely to increase the dividend payout and are also more likely to be new and young managers. Lower debt ratios characterize spending increases that resolve uncertainty, and these announcements result in negative market reactions. These results suggest that the resolution of uncertainty about the firm performance influences the information content of capital expenditure announcements and supports the idea that managers attempt to resolve (create) uncertainty about favorable (unfavorable) outcomes. Capital Investment and the Resolution of Uncertainty Uncertainty surrounding the outcomes of capital projects makes it difficult for outside investors to evaluate managers ’ investment decisions. Thus, managers who prefer not to be evaluated, for instance managers who have bad projects or who pursue self-serving investmen