Capital Heterogeneity, Time-to-Build, and Return Predictability

Short selling, agency, and corporate investment

“…Investment takes time (e.g., Kydland & Prescott, 1982), and the time lags vary across different types of capital investment. Luo (2019) shows that structures investment (e.g., factories) requires a longer time to complete than equipment investment (e.g., machines). At the aggregate level, equipment investment comoves with total factor productivity (TFP), but structures investment lags TFP.…”

“…This suggests that equipment investment is sensitive to changes in economic conditions and that structures investment has a delayed response to those changes. Following the insight from Luo (2019), we hypothesize that equipment investment is more sensitive to short selling than is structures investment. Accordingly, the effects of short selling on firms’ investment should be stronger in industries with high equipment investment than in those with high structures investment.…”

“…We explore cross‐sectional heterogeneity in the relation between investment and short interest based on the types of corporate investments. The literature (e.g., Luo, 2019) finds that structures investment (e.g., factories) requires longer to complete than equipment investment (e.g., machines) and that equipment investment is more responsive to changing market conditions than structures investment. We hypothesize that the effects of short interest on firms’ investment are stronger in industries with a high proportion of equipment investment than in those with a high proportion of structures investment.…”