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Firm Migration and Stock Returns

  • Giovanni W. PUOPOLO

    (University of Lausanne and Swiss Finance Institute)

This paper studies the asset pricing implications of a general equi- librium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the capital of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of re- sources and affects firm's value, generating mean-reverting dynamics

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-29.

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Length: 53 pages
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Handle: RePEc:chf:rpseri:rp0929
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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