Expected Investment Growth and the Cross Section of Stock Returns

57 Pages Posted: 9 Dec 2016 Last revised: 18 Dec 2018

See all articles by Jun Li

Jun Li

University of Texas at Dallas

Huijun Wang

Auburn University; University of Melbourne

Date Written: December 2, 2017

Abstract

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

Suggested Citation

Li, Jun and Wang, Huijun, Expected Investment Growth and the Cross Section of Stock Returns (December 2, 2017). Available at SSRN: https://ssrn.com/abstract=2882025 or http://dx.doi.org/10.2139/ssrn.2882025

Jun Li

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Huijun Wang (Contact Author)

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

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