Lumpy Investment and Expected Stock Returns
16 Pages Posted: 23 Jun 2020 Last revised: 17 Jul 2020
Date Written: May 24, 2020
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
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