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Endogenous technological progress and the cross section of stock returns

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  • Lin, Xiaoji

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 endogenously 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 intangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14829.

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Date of creation: 15 Jan 2009
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Handle: RePEc:pra:mprapa:14829

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

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Cited by:
  1. Belo, Frederico & Yu, Jianfeng, 2013. "Government investment and the stock market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(3), pages 325-339.
  2. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, Springer, vol. 40(3), pages 429-442, December.
  3. Belo, Frederico & Lin, Xiaoji & Vitorino, Maria Ana, 2013. "Brand Capital and Firm Value," Working Paper Series 2013-04, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  4. Hiroki Arato & Katsunori Yamada, 2012. "Japan's Intangible Capital and Valuation of Corporations in a Neoclassical Framework," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 459-478, October.
  5. Yang, Fan, 2013. "Investment shocks and the commodity basis spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 164-184.
  6. Marcelo Ochoa, 2013. "Volatility, labor heterogeneity and asset prices," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-71, Board of Governors of the Federal Reserve System (U.S.).
  7. 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, Elsevier, vol. 66(12), pages 2390-2396.
  8. 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.

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