Abstract
This paper explores the link between the composition of firms' capital holdings and stock returns. I develop a general equilibrium production economy where firms use two factors: Real estate capital and other capital. Investment is subject to asymmetric adjustment costs that make cutting the capital stock costlier than expanding it. Because real estate depreciates slowly, firms with high real estate holdings are more vulnerable to bad productivity shocks, and real estate investment is riskier than investment in other capital. In equilibrium, investors demand a premium to hold these firms. This prediction is supported empirically. I find that the returns of firms with a high share of real estate capital compared to other firms in their industry exceed that of low real estate firms by 3-6% annually, adjusted for exposures to the market return, size, value, and momentum factors. Moreover, conditional beta estimates reveal that these firms indeed have higher market betas, and the spread between the betas of high and low real estate firms is countercyclical.
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