Investment Irreversibility, Real Activity and the Value Premium
30 Pages Posted: 20 Jul 2005
Date Written: March 1, 2005
We conduct an empirical investigation of an emerging strand of models, pioneered by Berk, Green and Naik (1999), relating firms' real investment behavior under investment irreversibility and asset return dynamics. The models in this literature share many of the same predictions. We first extend Cooper (2004) model and derive implications in terms of a relationship among an economically fundamental variable, namely the rate of capacity utilization, and return volatility, systematic risk and expected returns. Our evidence suggests that this economic variable explains return volatility, time variation in market beta, and is positively associated with expected returns and volatility of returns.
Keywords: Irreversible investment, capacity utilization, value premium
JEL Classification: G12
Suggested Citation: Suggested Citation