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Corporate Investment and Asset Price Dynamics: Implications for the Cross-section of Returns

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Author Info
MURRAY CARLSON
ADLAI FISHER
RON GIAMMARINO
Abstract

We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book-to-market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 6 (December)
Pages: 2577-2603
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:6:p:2577-2603

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  1. Joao F. Gomes & Leonid Kogan & Motohiro Yogo, 2007. "Durability of Output and Expected Stock Returns," NBER Working Papers 12986, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. François Gourio, 2005. "Operating Leverage,Stock Market Cyclicality,and the Cross-Section of Returns," Boston University - Department of Economics - Working Papers Series WP2005-002, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  3. François Gourio, 2006. "Firms’ Heterogeneous Sensitivities to the Business Cycle, and the Cross-Section of Expected Returns," Boston University - Department of Economics - Working Papers Series WP2006-005, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  4. Long Chen & Lu Zhang, 2007. "Neoclassical Factors," NBER Working Papers 13282, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2006. "Optimal Market Timing," NBER Working Papers 12014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Jin Ginger Wu & Lu Zhang & X. Frank Zhang, 2007. "Understanding the Accrual Anomaly," NBER Working Papers 13525, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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