54 Pages Posted: 26 Jul 2009 Last revised: 27 Jan 2013
Date Written: September 6, 2009
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: 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