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Lumpy investment and expected stock returns

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  • Im, Hyun Joong
  • Park, Heungju

Abstract

This study investigates the predictability of stock market returns using a novel corporate investment measure that captures the lumpiness of firm-level investment. We find that the proportion of firms with investment spikes (spike) is a strong predictor of excess stock returns. Specifically, an increase in spike significantly lowers future excess stock returns. The predictive ability of spike is consistently observed in both in-sample and out-of-sample tests. Furthermore, spike shows strong predictive ability at the business cycle frequency, suggesting that its predictive ability is driven by the time-varying risk premium associated with business cycles rather than temporary mispricing.

Suggested Citation

  • Im, Hyun Joong & Park, Heungju, 2020. "Lumpy investment and expected stock returns," Economics Letters, Elsevier, vol. 193(C).
    • Handle: RePEc:eee:ecolet:v:193:y:2020:i:c:s0165176520301798
    DOI: 10.1016/j.econlet.2020.109263
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    References listed on IDEAS

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