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Investment and the Cross‐Section of Equity Returns

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  • GIAN LUCA CLEMENTI
  • BERARDINO PALAZZO

Abstract

The data show that, upon being hit by adverse profitability shocks, large public firms have ample latitude to divest their least productive assets, reducing the risk faced by shareholders and the returns that they are likely to demand. In the one‐factor production‐based asset pricing model, when the frictions to capital adjustment are shaped to respect the evidence on investment, the model‐generated cross‐sectional dispersion of returns is only a small fraction of that documented in the data. Our conclusions hold even when operating or labor leverage is modeled in ways shown to be promising in the extant literature.

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  • Gian Luca Clementi & Berardino Palazzo, 2019. "Investment and the Cross‐Section of Equity Returns," Journal of Finance, American Finance Association, vol. 74(1), pages 281-321, February.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:1:p:281-321
    DOI: 10.1111/jofi.12730
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    3. Mathias Lé & Frédéric Vinas, 2020. "The Financing of Investment: Firm Size, Asset Tangibility and the Size of Investment," Working papers 777, Banque de France.
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    5. Muhammad Nazmul Khan, 2022. "Estimating empirical marginal adjustment cost function: a power series approach," Empirical Economics, Springer, vol. 63(6), pages 3185-3210, December.
    6. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
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    9. Hang Bai & Erica X.N. Li & Chen Xue & Lu Zhang, 2019. "Does Costly Reversibility Matter for U.S. Public Firms?," NBER Working Papers 26372, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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