How Much Business Investment Is Just Right?: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Andrew Lapthorne, a quantitative strategist at Societe Generale SA, recently looked at the correlation between business investment and individual stock prices, in a report titled "How does too much or too little investment affect a company's stock price?".

Some of their results were surprising: Stocks of companies that over- or underinvest get punished in Europe and North America. However, in Japan, firms don't seem to suffer as much for the consequences of their investments.

Take a look at the three charts below:

Overinvesting seems to be penalized more quickly than underinvesting. Overinvestment is a cost -- and a visible one -- which seems to hurt stock prices sooner rather than later. The effects of underinvestment have a future effect, as penalties to stock prices.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net