This paper addresses the asummetric feature of capital adjustment costs and presents empirical evidence that investment in fixed asset shows different responsiveness to stock mispricing depending on the sign of mispricing and the magnitude of capital adjustment costs. We show that, on average, firms increase investment when the prices are pessimistically biased but do not decrease investment when the prices are pessimistically biased. We further show that the sensitivity of investment to underpricing becomes insignificant for the firms with low operating flexibility, low asset redeployability, and low asset liquidity. Our findins imply that adjustment costs play a distinct role in firms investment decisions. Overall, our results suggest that the sign of mispricing and the magnitude of adjustment costs jointly make firms investment behavior be asymmetric.

Keywords: Corporate investment, Asymmetric behavior, Mispricing, CAPM alpha, Adjustment cost