How Much are Resource Projects Worth? A Capital Market Perspective

Abstract

In many cases, a company’s capital investment decision is not a one-off “yes/no”, but occurs as a result of a sequence of decisions of a more preliminary nature. Major resource investment projects, for example, typically have to pass several “feasibility” tests before companies fully commit to them. Accordingly, there is an “investment pipeline” of projects. In this study, we examine the stock-market reaction to announcements of the progress of investment projects as they flow down the pipeline. Using a sample of Australian stocks in the resources sector, we find substantial positive abnormal returns when firms announce a change in the status of their planned projects. Interestingly, the magnitude of reaction varies substantially with the location of the project in the pipeline (such as the project being “committed”, “under construction” and “completed”). These results reveal the value-enhancing effects of the market being informed of projects in the later stages of the investment pipeline. Further analysis shows that larger stock-market reactions tend to be associated with bigger projects, smaller firms and those with lower free cash flow.