This study examines the stock market's reaction to public announcements of corporate strategic investment decisions. It includes a wide variety of strategic decisions: formation of joint ventures, research and development projects, major capital expenditures, and diversification into new products and/or markets. Three alternative hypotheses concerning the stock market's reaction to announcements of these decisions are tested. The Shareholder Value Maximization hypothesis predicts a positive reaction to corporate investments because the stock market rewards managers for developing strategies that increase shareholder wealth. The Rational Expectations hypothesis predicts no stock price reaction because investors expect managers to undertake periodic investments in order to maintain their firms' competitive fitness. The Institutional Investors hypothesis predicts a negative reaction to announcements of corporate investments. The U.S. capital markets are dominated by institutional investors who, in pursuit of superior quarterly performance, may disdain longterm investments because they reduce short-term earnings. Analysis of 767 strategic investment decisions announced by 248 companies in 102 industries indicates that the stock market's reaction to strategic investments conforms most closely to the predictions of the Shareholder Value Maximization hypothesis. This overall finding holds for investments of varying size and duration. The implications of a positive reaction by the stock market to investment announcements are drawn for corporate strategy research and management practice.
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