If it's reinvested in the company, it might not pay off the same as investing it elsewhere. If the company's sitting there with a bunch of cash, and then they pass it back to their investors in a dividend, of course you expect the market capitalization to drop by exactly that amount: the company has the same future prospects for income, just that much less cash sitting in its bank account right now.
On the other hand, if it spends that money on some project intended to improve its future income, one doesn't just expect the market cap to drop by the amount they spent; they have less cash, but have presumably a better expectation of future income. The difference between the new market capitalization and the old one minus the amount spent can be interpreted as the market's estimate of how much that new internal investment was worth.
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timeasmymeasure
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Date: 2010-04-05 04:16 am (UTC)On the other hand, if it spends that money on some project intended to improve its future income, one doesn't just expect the market cap to drop by the amount they spent; they have less cash, but have presumably a better expectation of future income. The difference between the new market capitalization and the old one minus the amount spent can be interpreted as the market's estimate of how much that new internal investment was worth.