The Expected Investment Growth Premium

46 Pages Posted: 27 Jun 2018 Last revised: 30 Jul 2020

See all articles by Jun Li

Jun Li

University of Texas at Dallas

Huijun Wang

Auburn University; University of Melbourne

Jianfeng Yu

Tsinghua University

Date Written: July 29, 2020

Abstract

We propose a novel measure of investment plans, namely, expected investment growth (EIG) and find stocks with high EIG outperform stocks with low EIG by 17% per annum. This premium can be generated in a neoclassical model with the investment plan friction, in which a firm's expected returns increases with its planned investment due to an embedded leverage effect. We provide empirical evidence on the interaction of the cash flow effect and discount rate effect in driving this EIG premium. Our findings highlight the investment plan friction as an important economic channel to understand the cross-sectional risk premium.

Keywords: Investment Plan, Expected Investment Growth, Risk Premium

JEL Classification: G12

Suggested Citation

Li, Jun and Wang, Huijun and Yu, Jianfeng, The Expected Investment Growth Premium (July 29, 2020). Available at SSRN: https://ssrn.com/abstract=3195406 or http://dx.doi.org/10.2139/ssrn.3195406

Jun Li (Contact Author)

University of Texas at Dallas ( email )

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

Huijun Wang

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

Jianfeng Yu

Tsinghua University ( email )

Beijing, 100084
China

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