43 Pages Posted: 19 Oct 2014 Last revised: 7 Jan 2015
Date Written: September 12, 2014
We study the behavior of aggregate corporate investment from 1952-2010. Investment grows rapidly following high profits and stock returns but, contrary to standard predictions, is largely unrelated to recent changes in market volatility, interest rates, or the default spread on corporate bonds. At the same time, high investment predicts negative profit growth going forward and is associated with low stock returns when investment data are publicly released, suggesting that a jump in investment coincides with bad news. Our analysis also shows that the investment decline following the financial crisis of 2008 was not unusual given the drop in GDP and profits at the end of 2008.
Keywords: Investment, stock returns, profits, interest rates, uncertainty
Suggested Citation: Suggested Citation
Kothari, S.P. and Lewellen, Jonathan and Warner, Jerold B., The Behavior of Aggregate Corporate Investment (September 12, 2014). Simon Business School Working Paper No. FR 14-18; Tuck School of Business Working Paper No. 2511268; MIT Sloan Research Paper No. 5112-14. Available at SSRN: https://ssrn.com/abstract=2511268 or http://dx.doi.org/10.2139/ssrn.2511268