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Empirical Evidence on Capital Investment, Growth Options, and Security Returns


Christopher W. Anderson


University of Kansas - School of Business

Luis García-Feijóo


Florida Atlantic University - Department of Finance

July 26, 2002


Abstract:     
The model and simulations of Berk, Green, and Naik (BGN, 1999) suggest that exercise of growth options alters firm-specific characteristics such as firm size (MVE) and book-to-market ratio (B/M) commensurately with changes in systematic risk. Consistent with BGN, we show empirically that classification of firms to MVE and B/M portfolios as in Fama and French (1992, 1993) is conditioned on recent growth in capital expenditures. Specifically, firms classified as big and low-B/M (B/L) significantly accelerate investment prior to the classification year. In contrast, firms classified as small and high-B/M (S/H) reduce investment. We also find that stock returns vary inversely with prior investment growth, that the value premium diminishes after categorizing stocks by investment growth, and that variables based on growth in capital expenditures explain stock returns in cross-section and portfolio returns in times series. These empirical results are consistent with the notion that exercise of growth options affects firm-specific characteristics such as MVE and B/M and exposure to systematic risk.

Number of Pages in PDF File: 38

Keywords: Expected returns, Book-to-market, Size effect, Anomalies, Capital investment

JEL Classification: G12, G31

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Date posted: August 16, 2002  

Suggested Citation

Anderson, Christopher W. and García-Feijóo, Luis, Empirical Evidence on Capital Investment, Growth Options, and Security Returns (July 26, 2002). Available at SSRN: http://ssrn.com/abstract=320381 or http://dx.doi.org/10.2139/ssrn.320381

Contact Information

Christopher W. Anderson
University of Kansas - School of Business ( email )
1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7340 (Phone)
785-864-5328 (Fax)
HOME PAGE: http://www.business.ku.edu/gen/bschool_generated_pages/Anderson_Christopher_p1587.html
Luis Garcia-Feijoo (Contact Author)
Florida Atlantic University - Department of Finance ( email )
777 Glades Rd
Boca Raton, FL 33431
United States
954-236-1239 (Phone)
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