Capital Investment and Momentum Strategies

We study whether or not capital investment can affect stock price momentum strategies. We provide empirical evidence that stock price momentum effect tends to be stronger for the stocks with large capital investment. In particular, when capital investment is measured by scaled capital expenditure, capital investment has little impact on momentum strategies when it is from small to median; but momentum effect monotonically increases when capital investment increases from median to large. When we use the change of scaled capital expenditure or annual accruals to represent capital investment, its impact on momentum profit exhibits a "U curve. In addition, we find that capital investment can significantly increase stock price momentum profit. We present a simple explanation for our empirical results and show that our empirical finding is consistent with the behavioral finance theory that characterizes investors' increased psychological bias, the more limited arbitrage opportunity and the increased likelihood of informational cascade when firm value becomes more nebulous.