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The Behavior of Aggregate Corporate Investment

43 Pages Posted: 19 Oct 2014 Last revised: 7 Jan 2015

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Jerold B. Warner

University of Rochester – Simon Business School

Date Written: September 12, 2014

Abstract

We study the behavior of aggregate corporate investment from 1952-2010. Investment grows rapidly following high profits and stock returns but, contrary to standard predictions, is largely unrelated to recent changes in market volatility, interest rates, or the default spread on corporate bonds. At the same time, high investment predicts negative profit growth going forward and is associated with low stock returns when investment data are publicly released, suggesting that a jump in investment coincides with bad news. Our analysis also shows that the investment decline following the financial crisis of 2008 was not unusual given the drop in GDP and profits at the end of 2008.

Keywords: Investment, stock returns, profits, interest rates, uncertainty

Suggested Citation

Kothari, S.P. and Lewellen, Jonathan and Warner, Jerold B., The Behavior of Aggregate Corporate Investment (September 12, 2014). Simon Business School Working Paper No. FR 14-18; Tuck School of Business Working Paper No. 2511268; MIT Sloan Research Paper No. 5112-14. Available at SSRN: https://ssrn.com/abstract=2511268 or http://dx.doi.org/10.2139/ssrn.2511268

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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