Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks

66 Pages Posted: 10 Apr 2012 Last revised: 9 Nov 2018

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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

Kogan, Leonid and Papanikolaou, Dimitris, Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks (November 3, 2012). Available at SSRN: https://ssrn.com/abstract=2037578 or http://dx.doi.org/10.2139/ssrn.2037578

Leonid Kogan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

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Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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