This paper aims to provide a foundation for the notion of economic rate of return and investigate its relations with accounting rates of return. Introducing the notion of depreciation class (the set of depreciation schedules with the same aggregate book value) it is shown that the mean of the...

We investigate the cost of capital in a model with an agency conflict between inside managers and outside shareholders. Inside ownership reflects the classic tradeoff between incentives and risk diversification, and the severity of agency costs depends on a parameter representing investor...

Almeida, Campello, and Galvao (2010) [ACG] use Monte Carlo simulations and real data to assess the performance of estimators that deal with measurement errors in investment models. ACG are the first to provide an independent assessment of alternative methods, showing when they work properly and...

Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is...

In a neoclassical investment model, returns and investment are linked. We show that the timing of investment and returns are also linked. Conditional on total investment, firms investing earlier in the year have lower returns than firms investing later in the year. We show empirical evidence...

This paper explores reasons for the excess sensitivity of (under- or over-) investment to free cash flow. Using accounting information from Chinese listed firms, we find robust support for the fact that higher sensitivities of abnormal investment to free cash flow can be caused by financial...

This paper investigates the changes in firm value triggered by corporate tax rate changes for which firms have balances on deferred tax allowances and deferred tax assets. The effects on both investment to fixed/current assets are well taken care of with embedded production functions and firm...

I show that access to the public debt market is associated with a significant reduction in the level of capital expenditures and takeovers, especially for firms with higher credit risk. Firms accessing the bond market also become less likely to violate debt covenants, reduce the level of payouts...

This paper uses the financial crisis of 2008 as a natural experiment to demonstrate that when measuring investment-cash flow sensitivity, the value of a firm's assets that can be used as collateral should be taken into account. Using panel data on U.S. firms from 1990 to 2011, it was found that...

This paper rationalizes empirical patterns of market leverage, book leverage, book-to-market ratios, and stock returns across different book-to-market portfolios, using a model of firm financing and investment. The model shows analytically that tax-deductibility of interest payments increases...