Profitability and Stock Returns in Production-Based Asset Pricing with Decreasing Returns to Scale

Production decisions provide a credible indicator of future costs of capital perceived by corporate insiders and so may forecast future stock returns. We find that, under decreasing returns to scale, investment returns correlate imperfectly with stock returns and that higher profitability and traditional value are both associated with higher chosen risk exposure. Capital investment and utilization predict profitability and future returns. …