Abstract - Dynamic Corporate Capital Stocks: Cross-sectional and Inter-temporal Stock Return Patterns

We investigate a general multiple security equilibrium model in which firms adjust their capital stock in response to economic shocks. Asset values are determined by competitive risk-averse investors. When corporate capital goes up on value, firms react by creating more of it. This leads to additional risk that must be borne by investors. Overall, the model generates a vector VAR(1) structure for the state variables determining the cross-section of expected returns, and is broadly consistent with stylized facts (e.g., the value premium, size premium, earnings momentum, and investment premium). In addition, the paper tests a new prediction of the model and finds support for it in the data.

Jacob Sagi
Room "DZ Bank" (HoF)
Vanderbilt University
09.Jun 2009

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