Quarterly investment spikes, stock returns, and the investment factor

Abstract

We find that abnormal fourth-quarter capital expenditures are negatively correlated with future stock returns. While this evidence is linked to the asset growth factor, it cannot be entirely attributed to it. The fact that the relationship reverts with contemporaneous returns suggests that ad hoc investments may reflect changing discount rates. However, additional tests indicate that the reported effect is amplified by high payouts, low debt levels, and high idiosyncratic volatility, which is suggestive of over-investment issues. Our analysis supports the notion that firms’ investment decisions contain intricate but valuable information about stock returns.