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

2004/11/23 by MURRAY CARLSON, Murray Carlson, ADLAI FISHER +3 · 751 citations
Economics, Econometrics and Finance · #Asset (computer security) #Behavioral economics #Capital Investment and Risk Analysis #Computer science #Econometrics #Economic theories and models #Economics #Finance #Financial Markets and Investment Strategies #Financial economics #Investment (military) #Investment decisions #Leverage (statistics) #Market portfolio #Microeconomics #Monetary economics #Operating leverage #Portfolio

paper · doi:10.1111/j.1540-6261.2004.00709.x

published in The Journal of Finance 59(6), 2577-2603 (Wiley)

openalex publication_date 2004/11/23 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/31

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.

Citations

• Evaluating Natural Resource Investments
• The Value Premium
• Conditioning Variables and the Cross Section of Stock Returns
• Evidence on the Characteristics of Cross Sectional Variation in Stock Returns
• Rational Momentum Effects

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Related

• Optimal Investment, Growth Options, and Security Returns
• Asset Growth and the Cross‐Section of Stock Returns
• Empirical Evidence on Capital Investment, Growth Options, and Security Returns
• The Role of Growth Options in Explaining Stock Returns
• Growth Opportunities, Technology Shocks, and Asset Prices