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Corporate Investment and Stock Return Momentum

Author

Listed:
  • Ki C. Han

    (Sawyer Business School, Suffolk University, 8 Ashburton Place, Boston, MA 02108, USA)

  • Abu Jalal

    (Sawyer Business School, Suffolk University, 8 Ashburton Place, Boston, MA 02108, USA)

  • Karen Simonyan

    (Sawyer Business School, Suffolk University, 8 Ashburton Place, Boston, MA 02108, USA)

Abstract

We investigate the link between corporate investment and the momentum effect in stock returns. We argue that the momentum effect in a firm’s stock returns tends to be generated as a result of a series of information exchanges between stock market investors and firm insiders regarding the firm’s investment opportunities. Our theoretical setup predicts that past winners (losers) are likely to increase (decrease) their net investment, and the more they invest (disinvest) the more likely they are to realize positive (negative) returns in subsequent periods. Our empirical tests using a large sample of firms in 1984–2017 provide support for our hypotheses. We further design a momentum trading strategy, which buys past winners with positive predicted changes in net investment and sells past losers with negative predicted changes in net investment, and demonstrate that this trading strategy generates superior returns compared to a simple momentum trading strategy.

Suggested Citation

  • Ki C. Han & Abu Jalal & Karen Simonyan, 2022. "Corporate Investment and Stock Return Momentum," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 25(01), pages 1-59, March.
    • Handle: RePEc:wsi:rpbfmp:v:25:y:2022:i:01:n:s0219091522500060
    DOI: 10.1142/S0219091522500060
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