Endogenous Technological Progress and the Cross Section of Stock Returns
Ohio State University (OSU) - Fisher College of Business
November 26, 2012
Journal of Financial Economics (JFE), Forthcoming
Fisher College of Business Working Paper No. 12-03-022
Charles A. Dice Center Working Paper No. 2012-022
I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is endogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between intangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.
Number of Pages in PDF File: 62
Keywords: Technological Progress, R&D Investment, Stock Return
JEL Classification: E23, E44, G12
Date posted: March 25, 2008 ; Last revised: November 26, 2012
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