Investment Irreversibility, Real Activity and the Value Premium
BI Norwegian Business School; Tel Aviv University, Graduate School of Business Administration
University of Houston; China Academy of Financial Research (CAFR)
Norwegian School of Management (BI) - Department of Financial Economics
March 1, 2005
EFA 2005 Moscow Meetings Paper
We conduct an empirical investigation of an emerging strand of models, pioneered by Berk, Green and Naik (1999), relating firms' real investment behavior under investment irreversibility and asset return dynamics. The models in this literature share many of the same predictions. We first extend Cooper (2004) model and derive implications in terms of a relationship among an economically fundamental variable, namely the rate of capacity utilization, and return volatility, systematic risk and expected returns. Our evidence suggests that this economic variable explains return volatility, time variation in market beta, and is positively associated with expected returns and volatility of returns.
Number of Pages in PDF File: 30
Keywords: Irreversible investment, capacity utilization, value premium
JEL Classification: G12working papers series
Date posted: July 20, 2005
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