Abstract

http://ssrn.com/abstract=1598548
 
 

References (94)



 


 



Private Investment and Public Equity Returns


Robert B. Couch


Willamette University - Atkinson Graduate School of Management; Willamette University (Atkinson GSM)

Wei Wu


Willamette University (Atkinson GSM)

July 9, 2011

Journal of Economics and Business, Vol. 64, No. 2, 2012

Abstract:     
Owners of non-publicly-traded businesses who face significant external financing costs should have a hedging preference for financial assets whose returns are positively correlated with self-financing needs. If this effect is aggregated, expected returns on financial assets should correspond negatively with aggregate private investment self-financing needs. To test the cross-sectional asset pricing implications of this conjecture, we use realized noncorporate investment growth and future forecasted noncorporate investment growth as proxies for self-financing needs. We find that our private investment empirical specification can explain a good share of the cross-sectional returns of size-, value- and distress-sorted equity portfolios, almost as well as the Fama-French factors. However, in the Fama-French model, the estimated risk premium for the market factor is significantly negative. This contradicts traditional portfolio-diversification theory. Our specification, in contrast, generates estimated risk premia whose signs accord our story of private investment self-financing needs. We also consider how our results compare to the return-on-equity and investment factors of Chen, Novy-Marx and Zhang (2011), and find that our models are not coextensive. Finally, we consider how our results depend on credit boom versus credit crunch conditions and find that returns behave in a way that is consistent with our private investment story.

Number of Pages in PDF File: 49

Keywords: Asset Pricing, Financial Constraints, Distress Portfolio, Bootstrap, Cross-sectional Asset Returns, GMM, Private Investment, Credit Cycle

JEL Classification: G12, G32

Accepted Paper Series


Download This Paper

Date posted: May 4, 2010 ; Last revised: June 5, 2013

Suggested Citation

Couch, Robert B. and Wu, Wei, Private Investment and Public Equity Returns (July 9, 2011). Journal of Economics and Business, Vol. 64, No. 2, 2012. Available at SSRN: http://ssrn.com/abstract=1598548 or http://dx.doi.org/10.2139/ssrn.1598548

Contact Information

Robert B. Couch
Willamette University - Atkinson Graduate School of Management ( email ) ( email )
900 State Street
Salem, OR 97301
United States
Willamette University (Atkinson GSM) ( email ) ( email )
900 State Street
Salem, OR 97301
United States
Wei Wu (Contact Author)
Willamette University (Atkinson GSM) ( email )
900 State Street
Salem, OR 97301
United States
Feedback to SSRN


Paper statistics
Abstract Views: 575
Downloads: 86
Download Rank: 174,282
References:  94
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.297 seconds