Connecting Optimal Capital Investment and Equity Returns

50 Pages Posted: 2 Oct 2003

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

Economic theory predicts a contemporaneous correlation between equity returns and investment growth that is only weakly present in the data. By modifying the firm's production function to include a lag between investment decisions and expenditures, and after correcting for the temporal aggregation of investment, I find the predicted correlation to be present in the data. I estimate the model for 31 industries and find that investment returns are highly correlated with the industry portfolio equity returns. Further, the portion of investment returns orthogonal to equity returns is associated positively with changes in profitability and negatively with lagged differences between equity and investment returns.

JEL Classification: E22, G12, G31

Suggested Citation

Porter, R. Burt, Connecting Optimal Capital Investment and Equity Returns (December 2004). Available at SSRN: https://ssrn.com/abstract=439160 or http://dx.doi.org/10.2139/ssrn.439160

R. Burt Porter (Contact Author)

Iowa State University ( email )

College of Business
3345 Gerdin Business Bldg
Ames, IA 50011-2063
United States
515-294-2612 (Phone)

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