Connecting Optimal Capital Investment and Equity Returns
AbstractEconomic theory predicts a contemporaneous correlation between equity returns and investment growth that is only weakly present in the data. By modifying the firm’s production function to include a lag between investment decisions and expenditures, and after correcting for the temporal aggregation of investment, I find the predicted correlation to be present in the data. I estimate the model for 31 industries and find that investment returns are highly correlated with the industry portfolio equity returns. Further, the portion of investment returns orthogonal to equity returns is associated positively with changes in profitability and negatively with lagged differences between equity and investment returns.
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Bibliographic InfoArticle provided by Financial Management Association in its journal Financial Management.
Volume (Year): 34 (2005)
Issue (Month): 2 (Summer)
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Postal: University of South Florida 4202 E. Fowler Ave. COBA #3331 Tampa, FL 33620
Web page: http://www.fma.org/
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