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Growth Opportunities, Technology Shocks, and Asset Prices

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  • Leonid Kogan
  • Dimitris Papanikolaou

Abstract

We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns. IST shocks reflect technological advances embodied in new capital goods. Using a structural model, we show that IST shocks have a differential effect on the two fundamental components of firm value, the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, risk premia on firms with abundant growth opportunities are different from those on firms with limited growth opportunities. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns. Our model replicates the failure of the conditional CAPM to capture the value premium. Our empirical tests confirm the model's predictions for asset returns and investment rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17795.

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Date of creation: Jan 2012
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Publication status: published as Kogan, L., D. Papanikolaou, 2014, “Growth Opportunities, Technology Shocks, and Asset Prices.” Journal of Finance, 69, 675-718.
Handle: RePEc:nbr:nberwo:17795

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Citations

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Cited by:
  1. Leonid Kogan & Dimitris Papanikolaou, 2010. "Growth Opportunities and Technology Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 532-36, May.
  2. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2013. "Technological Innovation: Winners and Losers," NBER Working Papers 18671, National Bureau of Economic Research, Inc.
  3. John Y. Campbell, 2013. "Comment on "Shocks and Crashes"," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28, pages 355-366 National Bureau of Economic Research, Inc.
  4. Leonid Kogan & Dimitris Papanikolaou, 2012. "A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks," NBER Working Papers 17975, National Bureau of Economic Research, Inc.
  5. Hyunbae Chun & Jung-Wook Kim & Randall Morck, 2013. "Productivity Growth and Stock Returns: Firm- and Aggregate-Level Analyses," NBER Working Papers 19462, National Bureau of Economic Research, Inc.

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