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Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns
Author(s) -
CARLSON MURRAY,
FISHER ADLAI,
GIAMMARINO RON
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00709.x
Subject(s) - leverage (statistics) , portfolio , economics , operating leverage , asset (computer security) , financial economics , market portfolio , investment (military) , econometrics , investment decisions , microeconomics , monetary economics , finance , behavioral economics , computer science , computer security , machine learning , profitability index , politics , political science , law
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.