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Investment Plans and Stock Returns

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  • Owen A. Lamont

Abstract

When the discount rate falls, investment should rise. Thus with time‐varying discount rates and instantly changing investment, investment should positively covary with current stock returns and negatively covary with future stock returns. Aggregate nonresidential U.S. investment contradicts both these implications, probably because of investment lags. Investment plans, however, satisfy both implications. These investment plans, from a U.S. government survey of firms, are highly informative measures of expected investment and explain more than three‐quarters of the variation in real annual aggregate investment growth. Plans have substantial forecasting power for excess stock returns, showing that time‐varying risk premia affect investment.

Suggested Citation

  • Owen A. Lamont, 2000. "Investment Plans and Stock Returns," Journal of Finance, American Finance Association, vol. 55(6), pages 2719-2745, December.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:6:p:2719-2745
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    File URL: https://doi.org/10.1111/0022-1082.00304
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