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Construction, Real Uncertainty, and Stock-Level Investment Anomalies

Published online by Cambridge University Press:  24 January 2024

Kevin Aretz Open the ORCID record for Kevin Aretz [Opens in a new window]  and
Anastasios Kagkadis Open the ORCID record for Anastasios Kagkadis [Opens in a new window]
Kevin Aretz*
Affiliation:
Alliance Manchester Business School, University of Manchester
Anastasios Kagkadis
Affiliation:
University of Liverpool Management School, University of Liverpool Lancaster University Management School, Lancaster University a.kagkadis@liverpool.ac.uk
*
kevin.aretz@manchester.ac.uk (corresponding author)
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Abstract

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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 32
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are greatly indebted to an anonymous referee and Thierry Foucault (the editor) for outstanding advice and feedback. We are further indebted to Utpal Bhattacharya, Michael Brennan, Ling Cen, Nicholas Chen, Sudipto Dasgupta, Christian Riis Flor, Jon Garfinkel, Matti Keloharju, Roni Michaely, Walt Pohl, Peter Pope, Elena Simintzi, George Skiadopoulos, John Wei, Yizhou Xiao, conference participants at the 2020 British Association of Management (BAM) Conference, the 2020 Paris December Finance (EUROFIDAI) Meeting, and the 2020 Southern Denmark University (SDU) Finance Workshop, and seminar participants at the Chinese University of Hong Kong, the University of Cyprus, the University of Edinburgh, the University of Groningen, the University of Kent, the University of Nottingham, and the University of Piraeus for many useful suggestions.

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