Construction, Systematic Risk, and Stock-Level Investment Anomalies

We offer evidence that the tendency of high real-investment stocks to underperform others is driven by firms physically constructing new capacity. The conditioning ability of construction work does not come from differences in investment intensity, financing sources, or profitability. Yet, it may arise from the profits of constructing firms becoming less sensitive to their industries’ conditions after the investment year. Setting up a real options model in which newly-built capacity becomes operational only after some time-to-build period but ultimately produces profits which are less sensitive to negative demand shocks, we demonstrate that our evidence is consistent with neoclassical finance theory