We find that business cycles drive productive economic churn. During recessions, firms with high previous abnormal investment scale back while firms with low abnormal investment scale up. These findings are consistent with an improvement in the effciency of new investment over the business cycle. Our estimates suggest that an average rm cuts abnormal investment during recessions by about 14%, or roughly $276M. Valuation ratios converge similarly, with reductions in unexpected investment showing relative value improvement. Our results are stronger for less entrenched firms and firms with more active shareholders, which points to shareholder monitoring as an economic channel. Overall, the effciency of new investment appears to improve in recessions and decline in expansions, consistent with creative destruction on the intensive margin.

Keywords: Abnormal Investment, Economic Downturns, Overinvestment, Underinvestment, Shareholder Monitoring, Managerial Entrenchment

JEL: G0, G30, G32​