What Moves Investment Growth?

42 Pages Posted: 18 Mar 2011

See all articles by Long Chen

Long Chen

Luohan Academy; Cheung Kong Graduate School of Business

Zhi Da

University of Notre Dame - Mendoza College of Business

Borja Larrain

Pontificia Universidad Catolica de Chile

Date Written: March 15, 2011

Abstract

We study the determinants of corporate investment growth in the U.S. We use accounting identities to develop a system in which unexpected changes in investment growth are decomposed into surprises to current earnings growth, surprises to current stock returns, revisions of expectations about future cash flow growth, and revisions of expectations about future discount rates. Using a vector autoregressive model we find that the lion's share of variation in investment growth is strongly related to surprises to current earnings growth instead of news about the future, which suggests that the bulk of investment is myopic instead of forward-looking. This happens because neither cash holdings nor net payout (including external financing) vary enough to break the link between earnings shocks and investment. In a simple q-model we are able to replicate the large comovement of investment growth and surprises to current earnings growth, but at the cost of producing a counterfactually high comovement of investment growth and return surprises.

Keywords: aggregate investment, variance decomposition, q-theory, earnings shocks, cash flow news, discount rate news

JEL Classification: E22, G12

Suggested Citation

Chen, Long and Da, Zhi and Larrain, Borja, What Moves Investment Growth? (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786485 or http://dx.doi.org/10.2139/ssrn.1786485

Long Chen

Luohan Academy ( email )

No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
China
+86-0571-2688-8888-75520 (Phone)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Borja Larrain (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

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