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Investment Irreversibility, Real Activity and the Value PremiumIlan CooperBI Norwegian Business School; Tel Aviv University, Graduate School of Business Administration Guojun WuUniversity of Houston; China Academy of Financial Research (CAFR) Bruno GerardNorwegian School of Management (BI) - Department of Financial Economics March 1, 2005 EFA 2005 Moscow Meetings Paper Abstract: 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: G12 working papers seriesDate posted: July 20, 2005Suggested CitationContact Information
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