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Macroeconomic News in the Cross Section of Asset Growth

32 Pages Posted: 17 Jan 2017 Last revised: 23 Jun 2017

Yu Hou

Queen's University - Smith School of Business

Artur Hugon

Arizona State University (ASU)

Matthew R. Lyle

Northwestern University - Kellogg School of Management

Seth Pruitt

Arizona State University (ASU) - Finance Department

Date Written: June 21, 2017

Abstract

Firms make forward-looking decisions. We provide evidence that firms’ investment decisions contain news about future aggregate conditions. This information is best extracted by dimension-reduction techniques. The investment-based signal improves upon the widely-used GDP forecasts found in the Survey of Professional Forecasters. We appeal to news-driven business cycle theory to explain our result, suggesting that these investment decisions contain firms’ information about future productivity shocks. This theory also helps us to understand why accounting-based measures of investment reveal the news, while market-based measures of value do not.

Keywords: Gross Domestic Product, Out-Of-Sample, News-Driven Business Cycle, Partial Least Squares, Firm Investment

JEL Classification: M41, G17, E17

Suggested Citation

Hou, Yu and Hugon, Artur and Lyle, Matthew R. and Pruitt, Seth, Macroeconomic News in the Cross Section of Asset Growth (June 21, 2017). Available at SSRN: https://ssrn.com/abstract=2899862

Yu Hou

Queen's University - Smith School of Business ( email )

Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Artur Hugon

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Matthew Lyle

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Seth Pruitt (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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