Endogenous Technological Progress and the Cross Section of Stock Returns

62 Pages Posted: 25 Mar 2008 Last revised: 26 Nov 2012

Date Written: November 26, 2012


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.

Keywords: Technological Progress, R&D Investment, Stock Return

JEL Classification: E23, E44, G12

Suggested Citation

Lin, Xiaoji, Endogenous Technological Progress and the Cross Section of Stock Returns (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. Available at SSRN: https://ssrn.com/abstract=1012683 or http://dx.doi.org/10.2139/ssrn.1012683

Xiaoji Lin (Contact Author)

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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