Lumpy Investment and Expected Stock Returns

16 Pages Posted: 23 Jun 2020 Last revised: 17 Jul 2020

See all articles by Hyun Joong Im

Hyun Joong Im

Peking University - HSBC Business School

Heungju Park

Sungkyunkwan University - SKK Business School

Date Written: May 24, 2020

Abstract

This study investigates the predictability of stock market returns using a novel corporate investment measure that captures the lumpiness of firm-level investment. We find that the proportion of firms with investment spikes ("spike") is a strong predictor of excess stock returns. Specifically, an increase in "spike" significantly lowers future excess stock returns. The predictive ability of "spike" is consistently observed in both in-sample and out-of-sample tests. Furthermore, "spike" shows strong predictive ability at the business cycle frequency, suggesting that its predictive ability is driven by the time-varying risk premium associated with business cycles rather than temporary mispricing.

Keywords: lumpy investment, investment spike, stock return predictability, time-varying risk premium

JEL Classification: G12, G17, G31

Suggested Citation

Im, Hyun Joong and Park, Heungju, Lumpy Investment and Expected Stock Returns (May 24, 2020). Economics Letters, Vol. 193 (2020), 109263, Available at SSRN: https://ssrn.com/abstract=3595880 or http://dx.doi.org/10.2139/ssrn.3595880

Hyun Joong Im (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, Guangdong 518055
China

Heungju Park

Sungkyunkwan University - SKK Business School ( email )

Seoul
Korea, Republic of (South Korea)

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