The Expected Investment Growth Premium
52 Pages Posted: 27 Jun 2018 Last revised: 18 Dec 2018
Date Written: December 17, 2018
A neoclassical model with investment lags predicts that a firm's risk premium increases with its planned investment. Using a novel measure of investment plans, namely, expected investment growth (EIG), we document that high EIG firms earn an annualized return that is 15.4% higher than low EIG firms in the US sample from July 1968 to December 2016. This EIG premium cannot be captured by leading asset pricing models and is confirmed in various robustness checks. Further analyses provide empirical evidence for the embedded leverage effect of planned investment, which creates cross-sectional heterogeneity in the exposure to business cycle risk.
Keywords: Investment Plan, Expected Investment Growth, Risk Premium
JEL Classification: G12
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