Investment Shocks and Asset Returns: International Evidence

Abstract

Using a large cross section of stocks from over thirty countries, we examine the implications of investment-specific technological shocks for asset prices and macroeconomic quantities. We find that the negative risk premium associated with the investment shock is stronger and often significant in developed markets with greater access to capital, superior financial institutions, and stronger product market competition. The investment premium is related to, but not subsumed in, the value premium. The results underscore the importance of allocative efficiency in the pricing of technological advances, and help reconcile the conflicting existing evidence from the U.S. market with different sample periods.

Keywords: investment-specific technology shocks, investment-minus-consumption factor, international equity markets, economic development, value premium

JEL Classification: G12