IRREVERSIBLE CAPITAL AND THE STOCK-MARKET RESPONSE TO SHOCKS IN PROFITABILITY

This paper develops a vintage model of capital accumulation to identif y the structural linkage between shocks to input or output prices and a firm's stock-market value. The model accounts for a substantial part of the sample variation in excess returns, thus providing evidence fo r a systematic link between the stock-market valuation of firms and th e economic factors that affect their profitability. The 1973-1974 oil shock is shown to have had a strong impact on excess returns; firms wh ose capital consisted of vintages built when energy was relatively che ap were hit the hardest in value.