In a production-based asset pricing model with decreasing returns to scale following Brock (1982) stock returns at the firm level no longer identically equal investment returns but, instead, are determined by a measure of gross profitability, the book-to-market ratio, and the change in future profitability prospects. Firm decisions of capital investment and utilization both negatively predict profitability and future returns. Book-to-market ratios positively forecast returns as is typical, but with specific predicted exceptions. These implications are confirmed empirically and the production-based model with decreasing returns predicts costs of equity capital better than traditional asset pricing models.