Question

Pfizer corporation announced a new capital investment program, and its stock price increased. Western digital corporation (a disk-drive maker) announced a new capital investment program, and its stock price decreased. How do you explain these opposing responses? What should a company that is considering a new capital investment conclude from this evidence?

Answer 1

Stock prices of any company today reflect the shareholder's and investor's belief towards the management decisions and the ability of such a company to generate returns by investing the shareholder's money into profitable investments.

Given the above scenarios, where the stock prices increase for one company and decrease for another company when they announce capital investment decisions are based on some factors. Some of which are:

- Whether the investment is able to generate a positive Net Present Value (NPV) for the shareholders. If not, then share prices decrease because investors will sell their shares and invest in other companies.

- Whether the return generated from the project is more or equal to the return required by the shareholders. If not, share prices decrease.

- Whether the investments to be made will attract any legal penalties or hindrances in the future, or will the project compromise with the society at large. If yes, the share prices will decrease.

- Whether the source of finance for such investments is reliable and whether the company takes too much debt that increases the interest burden and the business risk as a whole.

All these considerations must be kept in mind. The ultimate aim of any company should be to increase the shareholder's value in the long term. Any compromise on this motive shall drive the investors away from the company and share prices fall as a result.