Investment Shocks and Asset Prices: An Investment-Based Approach

We propose a new approach, based on investment data, to determine firms’ return exposure to investment-specific technology (IST) shocks. When applied to U.S. data, we find that, in contrast to the pattern estimated from empirical IST proxies, value firms have higher exposure to IST shocks than growth firms. When applied to simulated data from existing theoretical models, our approach reveals that existing empirical findings may result from measurement errors in the IST proxies. Importantly, our simulation analysis uncovers the key role played by investment data in determining the economic mechanism through which IST shocks affect cross-sectional asset prices.