Definition

Physical asset expenditure includes expenditures on plant, machinery, property, equipment and other forms of physical asset expenditures including construction of new plant, installation of new plant, and upgrading of existing plant but excludes assets acquired through mergers and takeovers.

5.1.1 Mergers and takeovers

There are many empirical studies conducted on mergers and takeovers. Researchers have a good understanding of the market variations associated with mergers and takeovers. However this is not the case for physical asset expenditure announcements. While it may be argued that the market variation of physical asset expenditure announcements should resemble those of takeovers and mergers, this conclusion is premature, and requires future research.

As noted in the literature review chapter, empirical studies on capital expenditure outside the USA and Singapore are limited. This study excludes mergers and takeovers to allow for a clear focus on only physical asset expenditures.

Other reasons for excluding mergers and takeovers were discussed in Chapter 2, section 2.1. Briefly, the exclusion of mergers and takeovers reduces the valuation problems caused by information leakage, the presence of multiple bidders, and substantial shareholder notices. Hence, by focusing on only physical asset expenditure, it avoids any confounding effects caused by mergers and takeovers.

5.1.2 Acquisition of business and division of a business

Physical asset expenditure does not include expenditure associated with acquiring businesses and divisions of a business. This is because the substance of these transactions is very similar to mergers and takeovers, and hence they are most likely lead to confounding implications for this research.

5.1.3 Properties and land

Expenditures on properties and land fall into the definition of physical asset expenditure as they are physical in nature. Examples of expenditures on properties and land are the acquisition of shopping malls, office buildings, retail outlets, hotels, hospitals, land, and vineyards.

5.1.4 Upgrades vs maintenance

Expenditures on upgrades specifically exclude maintenance. Expenditures on upgrading existing plant are different from maintenance expenditure in that expenditures on upgrading are often associated with an increase in production capacity and employment, whereas maintenance is more of an operating item. Further, maintenance is often already anticipated by the equity market, and hence it is already incorporated into share prices. Upgrades are often material and are capitalised rather than being expensed periodically. The classification of upgrading, construction and installation sometimes overlap because some upgrades involve construction and installation of new facilities. Some examples of this type of expenditure are listed below:

“AGL was now proceeding with planned upgrade of the Roma to Brisbane natural gas pipeline system. The upgrade is expected to cost up to $100M by the time the project is complete. AGL plans to double the capacity of the Roma to Brisbane natural gas pipeline.”

“CSR has announced that it will upgrade its Hannan South treatment to 600,000 tonnes per annum capacity. Capital costs are $1.8M. The company aims to lift gold production to 36,000 ounces in 1994/95 and to 42,000 ounces in 1995/96.”

“Contracts have been signed with Thiess Contractors to facilitate the expansion of the Burton Coal Mine. The capital cost of the upgrade will be less than A$60M and will employ 130 people on an ongoing basis.”

5.1.5 Research and development

The definition of physical asset expenditure does not include research and development expenditure (R&D) because:

(1) most R&D expenditures are not physical, and

(2) where capitalised, R&D that satisfies the accounting requirement that future benefits are likely to be eventuated beyond reasonable doubt are rare. Though rare, this type of R&D might be announced separately if the sum involved is relatively large.87

5.1.6 Joint ventures

Some construction and acquisitions of new plant are undertaken via a joint venture. Joint ventures facilitate sharing of technology, management expertise and resources. Physical asset expenditures undertaken via joint ventures are included in the analysis. For example, some of the excerpts are provided below:

“The cinema joint venture between Village Roadshow, Greater Union and Warner Bros announced plans to construct a total of seven new multiplexes in Westfield Shopping towns around Australia for $200M.” [announcement made by Village Roadshow]

“Warner Bros/Greater Union/Village Roadshow joint venture, announced plans to double the size of their Australia wide chain of cinemas, spearheaded by the

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In a random sample of 30 large firms over the period 1995 to 1997, twenty-eight of the thirty capitalised R&Ds are announced concurrently with the year end announcement relating to current year events and future prospects. Only two of the thirty capitalised R&Ds are announced separately. Hence, it would be difficult to disentangle the actual market response from year end announcement and from R&D announcements.

development of 18 massive 20 to 25 screen MEGAPLEX Entertainment Centres.” [announcement made by Village Roadshow]

“Amcor announced that it will have an 83% interest in a $16M folding carton JV with the Chinese Government in Beijing. Amcor will invest $13M and the balance of the capital will be contributed by the China National Tobacco Corporation.”

“BHP Minerals will proceed with the development of the Hartley Platinum Project in Zimbabwe in a joint venture with Delta Gold. BHP Minerals will spend $310 million over three years to develop a platinum mine and processing facility.”