The Timing of Investment and Stock Returns

34 Pages Posted: 22 Nov 2011

See all articles by Neal Galpin

Neal Galpin

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: November 22, 2011

Abstract

In a neoclassical investment model, returns and investment are linked. We show that the timing of investment and returns are also linked. Conditional on total investment, firms investing earlier in the year have lower returns than firms investing later in the year. We show empirical evidence consistent with this prediction. Our model further predicts that the effects are strongest when the firm has cash flows early in the year. We confirm this prediction, as well. Moreover, regressing returns on annual investment year produces a much weaker relationship between returns and investment than regressing returns on semi-annual investment.

Keywords: q theory, stock returns

JEL Classification: G31, D21, D24

Suggested Citation

Galpin, Neal E., The Timing of Investment and Stock Returns (November 22, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1962953 or http://dx.doi.org/10.2139/ssrn.1962953

Neal E. Galpin (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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