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Review of Quantitative Finance and Accounting

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01-08-2012 | Original Research

Capital investment and momentum strategies

Authors: Guohua Jiang, Donglin Li, Gang Li

Published in: Review of Quantitative Finance and Accounting | Issue 2/2012

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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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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).

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

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

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Title: Capital investment and momentum strategies
Authors: Guohua Jiang
Donglin Li
Gang Li
Publication date: 01-08-2012
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 2/2012
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-011-0250-3

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Other articles of this Issue 2/2012

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

Experience, information asymmetry, and rational forecast bias

Analytical bounds for Treasury bond futures prices

Effects of tax reform on drop-off ratios and on the ex-dividend and ex-right prices

Corporate governance and the stock market reaction to new product announcements