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The Utilization Premium

Author

Listed:
  • Fotis Grigoris

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Gill Segal

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

Abstract

We study the interaction of flexible capital utilization and depreciation for expected returns and investment of firms. Empirically, an investment strategy that buys (sells) equities with low (high) utilization rates earns 5% per annum. Utilization predicts excess returns beyond other production-based variables. We reconcile this novel utilization premium quantitatively using a production model. The model suggests that flexible utilization is important for matching the cross-sectional distribution of investment and stock prices jointly. A model without flexible utilization yields many counterfactuals that flexible utilization addresses by making depreciation fluctuate endogenously. Overall, utilization tightens the link between firms’ production and valuations.

Suggested Citation

  • Fotis Grigoris & Gill Segal, 2024. "The Utilization Premium," Management Science, INFORMS, vol. 70(1), pages 207-224, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:207-224
    DOI: 10.1287/mnsc.2022.4647
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