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Real investment and risk dynamics

  • Cooper, Ilan
  • Priestley, Richard

We ask to what extent the negative relation between investment and average stock returns is driven by risk. We show that: (i) the average return spread between low and high asset growth and investment portfolios is largely accounted for by their spread in systematic risk, as measured by the loadings on the Chen, Roll, and Ross (1986) factors; (ii) as predicted by q-theory and real options models, systematic risk falls during large investment periods; (iii) the returns of factors formed on the investment-to-assets, asset growth, and investment growth all forecast aggregate economic activities. Our evidence suggests that risk plays an important role in explaining the investment-return relation.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11000353
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 1 (July)
Pages: 182-205

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:1:p:182-205
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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