Abstract
We offer evidence that the tendency of high real-investment stocks to underperform others (“investment anomaly”) is almost entirely attributable to firms physically constructing new capacity. The conditioning ability of construction work does not come from constructing firms making larger investments, relying on other financing sources, or being differentially profitable over or after the investment year. Yet, it may arise from their profits becoming less sensitive to their industries' conditions after that year. Setting up a real options model of the firm in which newly-built capacity becomes operational only after a time-to-build period but ultimately produces profits which are less sensitive to negative demand shocks over some random time, we show that our evidence is consistent with neoclassical finance theory.
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