The Utilization Premium

Fotis Grigoris () and Gill Segal ()
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Fotis Grigoris: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Gill Segal: Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599

Management Science, 2024, vol. 70, issue 1, 207-224

Abstract: We study the interaction of flexible capital utilization and depreciation for expected returns and investment of firms. Empirically, an investment strategy that buys (sells) equities with low (high) utilization rates earns 5% per annum. Utilization predicts excess returns beyond other production-based variables. We reconcile this novel utilization premium quantitatively using a production model. The model suggests that flexible utilization is important for matching the cross-sectional distribution of investment and stock prices jointly. A model without flexible utilization yields many counterfactuals that flexible utilization addresses by making depreciation fluctuate endogenously. Overall, utilization tightens the link between firms’ production and valuations.

Keywords: production; capacity; utilization; productivity; asset pricing (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:207-224

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