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Licence: CC BY: Creative Commons Attribution 4.0 International License
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Construction, Real Uncertainty, and Stock-Level Investment Anomalies
AU - Aretz, Kevin
AU - Kagkadis, Anastasios
PY - 2025/3/31
Y1 - 2025/3/31
N2 - We show that the negative relation between real investments and future stock returns is primarily driven by the subsample of firms building additional capacity. We develop a real options model to rationalize that evidence based on the premise that firms need to learn how to best operate modern capacity vintages, inducing idiosyncratic uncertainty in that capacity’s production costs over the learning period. Conversely, the uncertainty lowers the expected return of firms with newly built capacity until it is resolved. Further evidence based on profit sensitivities to aggregate conditions; analyst forecast-error volatilities; and high- versus low-tech industry subsamples supports our uncertainty explanation.
AB - We show that the negative relation between real investments and future stock returns is primarily driven by the subsample of firms building additional capacity. We develop a real options model to rationalize that evidence based on the premise that firms need to learn how to best operate modern capacity vintages, inducing idiosyncratic uncertainty in that capacity’s production costs over the learning period. Conversely, the uncertainty lowers the expected return of firms with newly built capacity until it is resolved. Further evidence based on profit sensitivities to aggregate conditions; analyst forecast-error volatilities; and high- versus low-tech industry subsamples supports our uncertainty explanation.
U2 - 10.1017/S0022109024000024
DO - 10.1017/S0022109024000024
M3 - Journal article
VL - 60
SP - 1042
EP - 1073
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
SN - 0022-1090
IS - 2
ER -