Investment Irreversibility, Real Activity and the Value Premium

30 Pages Posted: 20 Jul 2005

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Bruno Gerard

BI Norwegian Business School - Department of Finance

Date Written: March 1, 2005

Abstract

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

Cooper, Ilan and Wu, Guojun and Gerard, Bruno, Investment Irreversibility, Real Activity and the Value Premium (March 1, 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=676962 or http://dx.doi.org/10.2139/ssrn.676962

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Guojun Wu

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)

HOME PAGE: http://www.bauer.uh.edu/wu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Bruno Gerard

BI Norwegian Business School - Department of Finance ( email )

Nydalsveien 37
Oslo, N-0484
Norway
+4746410506 (Phone)

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