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Real investment and risk dynamics

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Author Info

  • Cooper, Ilan
  • Priestley, Richard

Abstract

We ask to what extent the negative relation between investment and average stock returns is driven by risk. We show that: (i) the average return spread between low and high asset growth and investment portfolios is largely accounted for by their spread in systematic risk, as measured by the loadings on the Chen, Roll, and Ross (1986) factors; (ii) as predicted by q-theory and real options models, systematic risk falls during large investment periods; (iii) the returns of factors formed on the investment-to-assets, asset growth, and investment growth all forecast aggregate economic activities. Our evidence suggests that risk plays an important role in explaining the investment-return relation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 1 (July)
Pages: 182-205

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:1:p:182-205

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Real investment Expected returns Systematic risk q-theory Real options;

References

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Cited by:
  1. Galil, Koresh & Shapir, Offer Moshe & Amiram, Dan & Ben-Zion, Uri, 2014. "The determinants of CDS spreads," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 271-282.
  2. Kroencke, Tim A. & Schindler, Felix & Sebastian, Steffen & Theissen, Erik, 2013. "GDP mimicking portfolios and the cross-section of stock returns," ZEW Discussion Papers 13-026, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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