The Timing of Investment and Stock Returns
34 Pages Posted: 22 Nov 2011
Date Written: November 22, 2011
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: Suggested Citation