model predicts that momentum losers have mild excess capacity, but fully utilize their capacity,

resulting in expected returns that are lower than for momentum winners. In contrast, long-term

losers have higher excess capacity and a less than full capacity utilization, resulting in expected

returns that are higher than for long-term winners. Cross-sectional and time-series tests show

that a fundamentals-based proxy for excess capacity strongly conditions the momentum and

long-term reversal effects in ways consistent with the model’s testable implications.