Quarterly Investment Spikes, Stock Returns and the Investment Factor

We propose abnormal fourth quarter capital expenditures as a proxy for managerial agency conflicts in investment decisions. In line with this interpretation, we document a negative link with future stock returns. Interestingly, the performance of the resulting zero-investment portfolio closely resembles the investment factor, which has become part of standard asset pricing models. Cross-sectional tests show that high cash flows, low dividend yields, and low debt levels aggravate the reported effect. Our analysis provides new evidence in support of an agency interpretation for the investment factor.