Capacity Constraints, Profit Margins and Stock Returns
نویسندگان
چکیده
This paper studies the e¤ects of capacity utilization on accounting pro t margins and stock returns. Since accounting pro t margins represent the average pro t per unit and not the economists concept of unit contribution margin, the marginal/variable pro t per unit, a rm with idle capacity can increase its pro t margins by increasing sales (output). However, if the rm is operating at full capacity, an increase in output must be preceded by an increase in capacity (and xed costs) resulting in lower pro t margins. Our empirical ndings suggest that rmspro t margins increase in sales when there is idle capacity, but decreases in sales when the rm approaches full capacity. We show that rms experiencing high growth in sales, operating in industries with high capacity utilization, experience abnormally low stock returns in the following period. JEL classi cation: E32, G12, G14, M41. Keywords: accounting valuation, abnormal returns, capacity utilization, pro tability, pro t margins
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