Why Are Aggregate Investing Activities Negatively Associated with Future Market Returns? The Role of Accounting Measurement

We examine whether differences in the accounting measurement of investment activities help explain the negative association between aggregate investments and future returns. We decompose aggregate investment activity into investments in tangible and intangible assets. We find that the previously documented negative association between aggregate investment and future market returns is largely explained by investments in intangible assets, especially in goodwill. These effects are stronger in recent periods and in the technology sector. In contrast, we find investments in tangible assets explain less of the negative association and are generally limited to both earlier time periods and the non-technology sector. Our results suggest the recognition of speculative M&A activities on the balance sheet helps explain the negative association between aggregate investments and future returns