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Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return PatternsJacob S. SagiVanderbilt University - Finance Matthew I. SpiegelYale University - Yale School of Management, International Center for Finance Masahiro WatanabeUniversity of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis September 6, 2009 AFA 2011 Denver Meetings Paper 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.
Number of Pages in PDF File: 54 Keywords: capital investment, profitability of capital, equity issuance, expected return, overlapping generations model, supply shocks JEL Classification: G12 working papers seriesDate posted: July 26, 2009 ; Last revised: January 27, 2013Suggested CitationContact Information
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