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Private investment and public equity returns

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  • Couch, Robert
  • Wu, Wei
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    Abstract

    Because of external financing costs, private business owners often need to self-finance new investment projects. These self-financing needs create an incentive for business owners to hold financial assets whose payoffs are positively correlated with self-financing needs. If this effect is aggregated, expected returns on financial assets should be negatively correlated with aggregate private investment self-financing needs. To test the cross-sectional asset pricing implications of this conjecture, we use realized noncorporate investment growth and future forecasted noncorporate investment growth as proxies for self-financing needs. We find that our private investment model can explain a good share of the cross-sectional returns of size-, value- and distress-sorted equity portfolios, almost as well as the Fama–French factors. In contrast to the Fama–French model, however, we find the signs on our estimated coefficients to be consistent with our theoretical predictions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 64 (2012)
    Issue (Month): 2 ()
    Pages: 160-184

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    Handle: RePEc:eee:jebusi:v:64:y:2012:i:2:p:160-184

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Asset pricing; Financial constraints; Private investment; GMM;

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