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Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return Patterns

54 Pages Posted: 26 Jul 2009 Last revised: 27 Jan 2013

Jacob S. Sagi

University of North Carolina Kenan-Flagler Business School

Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Date Written: September 6, 2009

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.

Keywords: capital investment, profitability of capital, equity issuance, expected return, overlapping generations model, supply shocks

JEL Classification: G12

Suggested Citation

Sagi, Jacob S. and Spiegel, Matthew I. and Watanabe, Masahiro, Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return Patterns (September 6, 2009). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1439044 or http://dx.doi.org/10.2139/ssrn.1439044

Jacob Sagi

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

Matthew I. Spiegel (Contact Author)

Yale University - Yale School of Management, International Center for Finance ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6017 (Phone)
203-432-8931 (Fax)

HOME PAGE: http://som.yale.edu/~spiegel

Masahiro Watanabe

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

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