The Role of Order Contracts in Shareholder Value Creation

Abstract

This thesis uses event study method to examine the stock price reaction to announced order contracts. Although numerous event types have been studied with the method over several decades, order contract announcements are rarely analysed but still very important especially in project-based business. The research sample consists of two minerals and metals processing technology companies: Outotec Oyj and FLSmidth Co. A/S. Besides defining the general stock reaction to order contracts, the sources of cross- sectional variation are tested. There are two main objectives in this research. The first one is to identify issues concerning the usage of event study method. This is particularly important because the sample size of two companies creates some methodological challenges. First objective is achieved by conducting a literature review of past researches in the field of event studies. Second objective is to define the general stock market reaction to announced order contracts and seek for explaining variables for cross-sectional variance. The variables that are tested in hypotheses are company net income percentage, order contract value, business area operating margin and inflation level. The hypothesis testing is done with regression analysis. The results show that significant stock price reaction to order contract announcement is found on event day and it is positive as expected. Comparison between companies indicates that higher net income percentage yields higher positive stock price reaction. Order contract value is found to be explaining factor of abnormal return variance to one company and inflation level to the other company. For academics the research brings new information to company fundamental valuation and clears some methodological issues. For managers, the results imply that investors are well aware of order size expectations, so effective investor communication is essential. The abnormal return variance stays unexplained for the most part, meaning that non-systematic factors contribute highly to the stock reaction of order contract announcements.