The Behavior of Aggregate Corporate Investment

Abstract

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