Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return Patterns

54 Pages Posted: 26 Jul 2009 Last revised: 27 Jan 2013

See all articles by Jacob S. Sagi

Jacob S. Sagi

University of North Carolina (UNC) at Chapel Hill - Finance Area

Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Date Written: September 6, 2009

Abstract

We investigate a general multiple security equilibrium model in which firms adjust their capital stock in response to economic shocks. Asset values are determined by competitive risk-averse investors. When corporate capital increases in value, firms react by creating more of it. This leads to additional risk that must be borne by investors. Overall, the model generates a VAR(1) structure for the state variables determining the cross-section of expected returns, and is broadly consistent with stylized facts (e.g., the value premium, size premium, earnings momentum, and investment premium). In addition, the paper tests a new prediction of the model and finds support for it in the data.

Keywords: capital investment, profitability of capital, equity issuance, expected return, overlapping generations model, supply shocks

JEL Classification: G12

Suggested Citation

Sagi, Jacob and Spiegel, Matthew I. and Watanabe, Masahiro, Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return Patterns (September 6, 2009). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1439044 or http://dx.doi.org/10.2139/ssrn.1439044

Jacob Sagi

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Matthew I. Spiegel (Contact Author)

Yale University - Yale School of Management, International Center for Finance ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6017 (Phone)
203-432-8931 (Fax)

HOME PAGE: http://som.yale.edu/~spiegel

Masahiro Watanabe

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
275
Abstract Views
2,899
Rank
202,355
PlumX Metrics