Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks
66 Pages Posted: 10 Apr 2012 Last revised: 9 Nov 2018
There are 2 versions of this paper
Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks
A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks
Date Written: November 3, 2012
Abstract
Average return differences among firms sorted on valuation ratios, past investment, prof- itability, market beta, or idiosyncratic volatility are largely driven by differences in exposures of firms to the same systematic factor related to embodied technology shocks. Using a calibrated structural model, we show that these firm characteristics are correlated with the ratio of growth opportunities to firm value, which affects firms’ exposures to capital-embodied productivity shocks and risk premia. We thus provide a unified explanation for several apparent anomalies in the cross-section of stock returns---namely, predictability of returns by these firm characteristics and return comovement among firms with similar characteristics.
Keywords: stock returns, investment, firm characteristics, predictability, value premium
JEL Classification: E20, E22, G10, G12
Suggested Citation: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
Optimal Investment, Growth Options, and Security Returns
By Jonathan Berk, Richard C. Green, ...
-
By Lu Zhang
-
A Cross-Sectional Test of a Production-Based Asset Pricing Model
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Capital Investments and Stock Returns in Japan
By Sheridan Titman, K. C. John Wei, ...
-
Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns
By Murray Carlson, Adlai J. Fisher, ...
-
By Eugene F. Fama and Kenneth R. French
