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Endogenous technological progress and the cross section of stock returns

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  • Xiaoji Lin

Abstract

I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is en- dogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between in- tangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not a¤ect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.

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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29047.

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Length: 51 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ehl:lserod:29047

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Keywords: Technological Progress; R&D Investment; Physical Investment; Stock Return;

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Citations

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Cited by:
  1. Frederico Belo & Xiaoji Lin & Maria Ana Vitorino, 2014. "Brand Capital and Firm Value," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 150-169, January.
  2. Gaganis , Chrysovalantis & Hasan, Iftekhar & Pasiouras , Fotios, 2013. "Efficiency and stock returns: Evidence from the insurance industry," Research Discussion Papers 14/2013, Bank of Finland.
  3. Hsu, Po-Hsuan & Wang, Chong & Wu, Chaopeng, 2013. "Banking systems, innovations, intellectual property protections, and financial markets: Evidence from China," Journal of Business Research, Elsevier, vol. 66(12), pages 2390-2396.
  4. Belo, Frederico & Yu, Jianfeng, 2013. "Government investment and the stock market," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 325-339.
  5. Frederico Belo & Xiaoji Lin & Fan Yang, 2014. "External Equity Financing Shocks, Financial Flows, and Asset Prices," NBER Working Papers 20210, National Bureau of Economic Research, Inc.
  6. Marcelo Ochoa, 2013. "Volatility, labor heterogeneity and asset prices," Finance and Economics Discussion Series 2013-71, Board of Governors of the Federal Reserve System (U.S.).
  7. Hiroki Arato & Katsunori Yamada, 2010. "Japan's Intangible Capital and Valuation of Corporations in a Neoclassical Framework," ISER Discussion Paper 0772, Institute of Social and Economic Research, Osaka University, revised Nov 2011.
  8. Yang, Fan, 2013. "Investment shocks and the commodity basis spread," Journal of Financial Economics, Elsevier, vol. 110(1), pages 164-184.

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