Firm Migration and Stock Returns

Giovanni Puopolo

No 09-29, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper studies the asset pricing implications of a general equi- librium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the capital of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of re- sources and affects firm's value, generating mean-reverting dynamics

Keywords: Investment; General equilibrium; Firm migration; Cross-section of returns; Book-to-market (search for similar items in EconPapers)
JEL-codes: D21 D24 D51 D92 G12 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2009-09
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Working Paper: Firm Migration and Stock Returns (2011)
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