Capacity Choice, Momentum, and Long-Term Reversals


Speaker:Peter Pope, London School of Economics
Date: Wednesday 25 February 2015
Time: 14:00
Location: Constantine Leventis

Further details

A copy of the full paper can be found here:


A real options-based firm valuation model suggests that momentum and long-term reversal

effects in stock returns arise through an excess capacity channel linked to expected returns. The

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.

Keywords Irreversible investment; real options; capacity choice; momentum effect; long-term reversal

effect; stock returns;

JEL Classification G11, G12, G15