Investment and Expected Stock Returns

26 Pages Posted: 21 Jul 2020

See all articles by Savina Rizova

Savina Rizova

Dimensional Fund Advisors

Namiko Saito

Dimensional Fund Advisors

Date Written: July 8, 2020

Abstract

Valuation theory predicts that, all else equal, expected investment should be negatively related to expected returns. We study the relation between expected investment and expected stock returns globally. We show that recent asset growth is a systematic proxy for future investment not only in the US, but also in developed ex US and emerging markets. Using this proxy, we find a negative investment effect across developed and emerging markets as well as across sectors in those regions, consistent with the prediction of valuation theory. Globally, the effect is much stronger among small caps than large caps and is mainly driven by the underperformance of high investment firms. Examining the different components of asset growth related to raising of capital as well as those related to use of capital, we find that all components contribute to the investment effect.

Keywords: investment, valuation theory, asset pricing, expected returns, equities, factor investing

JEL Classification: G12

Suggested Citation

Rizova, Savina and Saito, Namiko, Investment and Expected Stock Returns (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3646575 or http://dx.doi.org/10.2139/ssrn.3646575

Savina Rizova

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Namiko Saito (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

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