Quarterly Investment Spikes, Stock Returns and the Investment Factor
We document a negative link between abnormal fourth quarter capital expenditures and the cross-section of future stock returns. Interestingly, the performance of the resulting zero-investment portfolio closely resembles the investment factor, which has become part of standard asset pricing models. Further tests show that high payouts, low debt levels, and high idiosyncratic volatility amplify the reported effect, which is more in line with mispricing explanations rather than q-theory. Thus, our analysis provides new evidence in support of an agency interpretation for the investment factor