Investment Irreversibility, Real Activity and Asset Return Dynamics
Posted: 19 Jun 2013
Date Written: May 10, 2013
We conduct an empirical investigation of an investment-based asset pricing model. We introduce a novel theoretically derived economically fundamental variable, namely the rate of capital utilization and test its relationships with return volatility, systematic risk and expected returns. Our evidence, based on 459 manufacturing industries from the NBER productivity database, on the roles of assets in place and growth options in stock return dynamics is broadly consistent with the predictions of the new strand of models. We also propose a novel measure for the degree of investment irreversibility, namely the volatility of the capacity utilization rate.
Keywords: Real Investment, Capital Utilization, Expected Returns
JEL Classification: G12
Suggested Citation: Suggested Citation