Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns

Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns ABSTRACT We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book‐to‐market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns

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Abstract

ABSTRACT We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book‐to‐market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data.

Journal

The Journal of FinanceWiley

Published: Dec 1, 2004

References

  • The cross‐section of expected stock returns
    Fama, Fama; French, French
  • Optimal diversification: Reconciling theory and evidence
    Gomes, Gomes; Livdan, Livdan

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