The Information Content of Corporate Investment Annoucements : The Case of Joint Ventures

Partner firms to the same joint venture experience sharply different stock price reactions, controlling for differences in size and ownership share in the project. These differences are not explained by different roles in the project or differences in investor anticipation of the annoucement. Assuming that the reaction is entirely due to the value of the project at about 140 million dollars more than do the larger partner's investors. Thus, the reactions evidently reflect revaluation of non-project assets that is different for each partner. The evidence shows that firm characteristics indicative of the extent of shareholder- manager agency problems in the sense of Jensen (1986) statistically explain the difference. The evidence suggests that investors learn about the importance of agency problems for the value of the whole firm (not just the value of the marginal project) via the annoucement. Additionally, controlling for the extent of agency problems, free cash flow is shown to be value-enhancing for some partner firms