Capital investment and momentum strategies
Published online: 27 August 2011
Ó Springer Science+Business Media, LLC 2011
Abstract The main purpose of this paper is to investigate whether capital investment can
affect stock price momentum. We provide empirical evidence that momentum strategies
tend to be more proﬁtable for stocks with large capital investment or investment changes.
We present a simple explanation for our empirical results and show that our ﬁnding is
consistent with the behavioral ﬁnance theory that characterizes investors’ increased psy-
chological bias and the more limited arbitrage opportunity when the estimation of ﬁrm
value becomes more difﬁcult or less accurate.
Keywords Capital investment Á Momentum strategy Á Momentum proﬁt Á
JEL Classiﬁcation G11 Á G12 Á G14 Á M41
It has long been recognized by ﬁnancial economists and practitioners that capital invest-
ment affects future cash ﬂows and asset risk, and thus can have a signiﬁcant impact on
future stock returns. For example, recent studies by Fairﬁeld et al. (2003) and Titman et al.
(2004) show that capital investment can help to predict future stock returns in cross-
sectional analysis. In particular, low investment stocks tend to have signiﬁcantly higher
Department of Accounting, Guanghua School of Management, Peking University,
Beijing 100871, People’s Republic of China
D. Li (&) Á G. Li
Department of Finance, College of Business, San Francisco State University,
1600 Holloway Ave, San Francisco, CA 94132, USA
Rev Quant Finan Acc (2012) 39:165–188