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Capital investment and momentum strategies

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Abstract

The main purpose of this paper is to investigate whether capital investment can affect stock price momentum. We provide empirical evidence that momentum strategies tend to be more profitable for stocks with large capital investment or investment changes. We present a simple explanation for our empirical results and show that our finding is consistent with the behavioral finance theory that characterizes investors’ increased psychological bias and the more limited arbitrage opportunity when the estimation of firm value becomes more difficult or less accurate.

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Notes

  1. Some representative papers in investor’s psychological bias are Daniel et al. (1998, 2001); some representative works in the limited arbitrage opportunity are Barberis and Thaler (2003), Mitchell et al. (2002), and Shleifer and Vishny (1997).

  2. The web-address is: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  3. We would like to thank one referee for suggesting this analysis.

  4. We would like to thank one referee for suggesting this analysis.

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Authors and Affiliations

  1. Department of Accounting, Guanghua School of Management, Peking University, Beijing, 100871, People’s Republic of China

    Guohua Jiang

  2. Department of Finance, College of Business, San Francisco State University, 1600 Holloway Ave, San Francisco, CA, 94132, USA

    Donglin Li & Gang Li

Authors
  1. Guohua Jiang
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  2. Donglin Li
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  3. Gang Li
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Correspondence to Donglin Li.

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Jiang, G., Li, D. & Li, G. Capital investment and momentum strategies. Rev Quant Finan Acc 39, 165–188 (2012). https://doi.org/10.1007/s11156-011-0250-3

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