Expected Investment Growth and the Cross Section of Stock Returns
57 Pages Posted: 9 Dec 2016 Last revised: 18 Dec 2018
Date Written: December 2, 2017
We propose a measure of corporate investment plans, namely, the expected investment growth (EIG). We document a robust finding that firms with high EIG have larger future investment growth and earn significantly higher returns than firms with low EIG, which cannot be fully explained by leading factor models. Further analyses reveal that EIG is closely related to distress risk, especially at short-run horizons up to one year. Detailed comparisons with traditional distress risk measures highlight the distinction between the short-run and long-run horizons in reconciling the opposite signs of distress premium documented in the literature.
Keywords: Expected investment growth, cross-sectional stock returns, financial distress
JEL Classification: G12
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