Why Are Aggregate Investing Activities Negatively Associated with Future Market Returns? The Role of Intangible Investments

57 Pages Posted: 25 Apr 2017 Last revised: 26 Jan 2021

See all articles by Asher Curtis

Asher Curtis

University of Washington

Hyung Il Oh

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: June 26, 2018

Abstract

We reexamine the competing explanations for the negative association between aggregate investment and future market returns. We find that the rational explanation, based on increased investment following reductions in discount rates, appears incomplete. Instead, we find strong evidence supporting the behavioral explanation based on the underperformance of speculative investments. Specifically, the negative association between investments and future returns is concentrated in aggregate intangible investments (especially goodwill), which are positively related to contemporaneous market sentiment. In addition, the negative association is stronger in more recent periods with more M&A activity and purchase price accounting, indicating that the negative association between aggregate investment and future market returns is largely explained by a behavioral explanation based on speculative M&A activities.

Keywords: Aggregate Investment; Tangibles; Intangibles; Rational Versus Behavioral; Future Returns

JEL Classification: M40, E03

Suggested Citation

Curtis, Asher and Oh, Hyung Il, Why Are Aggregate Investing Activities Negatively Associated with Future Market Returns? The Role of Intangible Investments (June 26, 2018). Available at SSRN: https://ssrn.com/abstract=2957984 or http://dx.doi.org/10.2139/ssrn.2957984

Asher Curtis (Contact Author)

University of Washington ( email )

Seattle, WA 98195
United States

Hyung Il Oh

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

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