Construction, Systematic Risk, and Stock-Level Investment Anomalies

75 Pages Posted: 14 Oct 2020 Last revised: 19 Mar 2021

See all articles by Kevin Aretz

Kevin Aretz

Alliance Manchester Business School

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance

Date Written: March 19, 2021

Abstract

We offer evidence that the tendency of high real-investment stocks to underperform others is driven by firms physically constructing new capacity. The conditioning ability of construction work does not come from differences in investment intensity, financing sources, or profitability. Yet, it may arise from the profits of constructing firms becoming less sensitive to their industries’ conditions after the investment year. Setting up a real options model in which newly-built capacity becomes operational only after some time-to-build period but ultimately produces profits which are less sensitive to negative demand shocks, we demonstrate that our evidence is consistent with neoclassical finance theory.

Keywords: Asset pricing, real options, investment anomalies, flexible capacity, time-to-build

JEL Classification: G12, G13, G14

Suggested Citation

Aretz, Kevin and Kagkadis, Anastasios, Construction, Systematic Risk, and Stock-Level Investment Anomalies (March 19, 2021). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710507 or http://dx.doi.org/10.2139/ssrn.3710507

Kevin Aretz (Contact Author)

Alliance Manchester Business School ( email )

Crawford House
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Manchester M13 9PL, Lancashire
United Kingdom
+44(0) 161 275 6368 (Phone)
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HOME PAGE: http://www.kevin-aretz.com

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

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