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Empirical Evidence on Capital Investment, Growth Options, and Security Returns




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    • Anderson is at the School of Business, University of Kansas, Garcia-Feijóo is at the Department of Economics & Finance, College of Business Administration, Creighton University. For their comments and suggestions we thank Jonathan Berk, Joe Cavanaugh, Mark Hirschey, John Howe, Paul Koch, Tom Miller, Dick Pettway, Dean Thomson, an anonymous referee, Richard Green (former editor), and seminar participants at the University of Missouri, the University of Kansas, Iowa State University, the 2002 Eastern Finance Association Meetings, the 2002 Financial Management Association Meetings, and the 2003 Midwest Finance Association Meetings. Anderson is grateful to Mr. Charles Oswald for his funding of research grants in summer 2003 and summer 2004.


Growth in capital expenditures conditions subsequent classification of firms to portfolios based on size and book-to-market ratios, as in the widely used Fama and French (1992, 1993) methods. Growth in capital expenditures also explains returns to portfolios and the cross section of future stock returns. These findings are consistent with recent theoretical models (e.g., Berk, Green, and Naik (1999)) in which the exercise of investment-growth options results in changes in both valuation and expected stock returns.